UNITEDSTATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For the fiscal year ended
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For the transition period from to
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(Exact name of registrant as specified in its charter)
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Securities registered pursuant to Section12(b) of the Act:
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Depositary Shares, each representing a 1/1000th
fractional interest in a share of Series A Cumulative Perpetual Preferred Stock |
RILYP | Nasdaq Global Market | ||
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Depositary Shares, each representing a 1/1000th
fractional interest in a 7.375% share of Series B Cumulative Perpetual Preferred Stock |
RILYL | Nasdaq Global Market | ||
| 7.25% Senior Notes due 2027 | RILYG | Nasdaq Global Market | ||
| 7.50% Senior Notes due 2027 | RILYZ | Nasdaq Global Market | ||
| 6.50% Senior Notes due 2026 | RILYN | Nasdaq Global Market | ||
| 6.375% Senior Notes due 2025 | RILYM | Nasdaq Global Market | ||
| 6.75% Senior Notes due 2024 | RILYO | Nasdaq Global Market | ||
| 7.375% Senior Notes due 2023 | RILYH | Nasdaq Global Market | ||
| 6.875% Senior Notes due 2023 | RILYI | Nasdaq Global Market | ||
| 6.00% Senior Notes due 2028 | RILYT | Nasdaq Global Market |
Securities registered pursuant to Section12(g) of the Act: None
Indicateby check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Indicateby check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes:
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Indicateby check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities ExchangeAct of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90 days.
Indicateby check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuantto Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that theregistrant was required to submit such files).
Indicate by check mark whether the registrantis a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growthcompany. See the definitions of “large accelerated filer”, “accelerated filer,” “smaller reportingcompany” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one)
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If an emerging growth company, indicate bycheck mark if the registrant has elected not to use the extended transition period for complying with any new or revised financialaccounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registranthas filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financialreporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that preparedor issued its audit report. ☒
Indicate by check mark whether the registrantis a shell company (as defined in Rule 12b-2 of the Act). Yes
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The aggregate marketvalue of the registrant’s common stock held by non-affiliates, based on the closing price of the registrant’s commonstock as reported on the NASDAQ Global Market on June 30, 2020, the last business day of the registrant’s most recently completedsecond fiscal quarter, was approximately $ million. For purposes of this calculation, it has been assumed that all sharesof the registrant’s common stock held by directors, executive officers and stockholders beneficially owning ten percent ormore of the registrant’s common stock are held by affiliates. The treatment of these persons as affiliates for purposes ofthis calculation is not conclusive as to whether such persons are, in fact, affiliates of the registrant.
As of February 24, 2021, there were
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitiveProxy Statement relating to the registrant’s 2021 Annual Meeting of Stockholders are incorporated by reference into PartIII of this Annual Report on Form 10-K to the extent stated herein. Such proxy statement will be filed with the Securities andExchange Commission within 120 days of the registrant’s fiscal year ended December 31, 2020.
B. RILEYFINANCIAL, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31,2020
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PART I
This Annual Reporton Form 10-K (this “Annual Report”) contains forward-looking statements regarding our business, financial condition,results of operations and prospects. Words such as “expect,” “anticipate,” “intend,” “plan,”“believe,” “seek,” “may,” “will,” “should,” “could,” “future,”“likely,” “predict,” “project,” “potential,” “continue,” “estimate”and similar expressions are generally intended to identify forward-looking statements, but are not exclusive means of identifyingforward-looking statements in this Annual Report. You should not place undue reliance on such forward-looking statements, whichare based on the information currently available to us and speak only as of the date on which this Annual Report was filed withthe Securities and Exchange Commission (the “SEC”). Because these forward-looking statements involve known and unknownrisks and uncertainties, there are important factors that could cause actual results, events or developments to differ materiallyfrom those expressed or implied by these forward-looking statements, including our plans, objectives, expectations and intentionsand other factors discussed in “Part I—Item 1A. Risk Factors” contained in this Annual Report. We undertake noobligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events orotherwise.
Except as otherwiserequired by the context, references in this Annual Report to “the Company,” “B. Riley,” “B. RileyFinancial,” “we,” “us” or “our” refer to the combined business of B. Riley Financial,Inc. and all of its subsidiaries.
Item 1. BUSINESS
General
B. Riley Financial,Inc. (NASDAQ: RILY) and its subsidiaries provide collaborative financial services and solutions through several operating subsidiariesincluding:
| ● | B. Riley Securities, Inc. (“B. Riley Securities”) is a leading, full service investmentbank providing financial advisory, corporate finance, research, securities lending and sales and trading services to corporate,institutional and high net worth individual clients. B. Riley Securities,(fka B. Riley FBR) was formed in November 2017 through the merger of B. Riley & Co, LLC and FBR Capital Markets &Co., which the Company acquired in June 2017. |
| ● | B. Riley Wealth Management, Inc . (“B.Riley Wealth Management”) provides comprehensive wealth management and brokerage services to individuals and families,corporations and non-profit organizations, including qualified retirement plans, trusts, foundations and endowments. B. Riley WealthManagement was formerly Wunderlich Securities, Inc., whose name was changed in June 2018. |
| ● | B. Riley Capital Management, LLC, a Securities and Exchange Commission (“SEC”) registeredinvestment advisor, which includes: |
| o | B. Riley Asset Management, an advisor to certain private funds and to institutional and high networth investors. |
| o | Great American Capital Partners, LLC (“GACP”), the general partner of two private funds,GACP I, L.P. and GACP II, L.P., both direct lending funds managed by WhiteHawk Capital Partners, L.P. pursuant to an investmentadvisory services agreement, that provide senior secured loans and second lien secured loan facilities to middle market publicand private U.S. companies. |
| ● | B. Riley Advisory Services provides expert witness, bankruptcy,financial advisory, forensic accounting, valuation and appraisal, and operations management services. |
| ● | B. Riley Retail Solutions, LLC (fka Great American Group, LLC), a leading provider of asset dispositionand auction solutions to a wide range of retail and industrial clients. |
| ● | B. Riley Real Estate works with real estate owners and tenantsthrough all stages of the real estate life cycle. Our real estate advisors advise companies, financial institutions, investors,family offices and individuals on real estate projects worldwide. A core focus of B. Riley real estate is the restructuring oflease obligations in both distressed and non-distressed situations, both inside and outside of the bankruptcy process, on behalfof corporate tenants. |
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| ● | B. Riley Principal Investments identifies attractive investmentopportunities and aims to deliver financial and operational improvement to its portfolio companies. Our team concentrates on opportunitiespresented by distressed companies or divisions that exhibit challenging market dynamics. Representative transactions include recapitalization,direct equity investment, debt investment, active minority investment and buyouts. B. Riley Principal Investments seeks to controlor influence the operations of our investments to deliver financial and operational improvements that will maximize free cash flow,and therefore, shareholder returns. As part of our principal investment strategy, we acquired United Online, Inc. (“UOL”or “United Online”) on July 1, 2016, magicJack VocalTec Ltd. (“magicJack”) on November 14, 2018 and onNovember 30, we acquired a 40% equity interest in with Lingo Management, LLC (“Lingo”), with the ability to acquirean additional 40% equity interest therein. |
| o | UOL is a communications company that offers consumer subscription services and products, consistingof Internet access services and devices under the NetZero and Juno brands primarily sold in the United States. |
| o | magicJack is a Voice over IP (“VoIP”) cloud-based technology and services communicationsprovider. |
| o | Lingo is a global cloud/UC and managed service provider. |
| ● | BR Brand Holding, LLC (‘BR Brands’), in which theCompany owns a majority interest, provides licensing of certain brand trademarks. BR Brand owns the assets and intellectual propertyrelated to licenses of six brands: Catherine Malandrino, English Laundry, Joan Vass, Kensie Girl, Limited Too and NanetteLepore as well as investments in the Hurley and Justice brands with Bluestar Alliance LLC (“Bluestar”), a brand managementcompany. |
We are headquarteredin Los Angeles with offices in major cities throughout the United States including New York, Chicago, Boston, Dallas, Memphis,Metro Washington D.C and West Palm Beach.
During the fourthquarter of 2020, the Company realigned its segment reporting structure to reflect organizational management changes. Under thenew structure, the valuation and appraisal businesses are reported in the Financial Consulting segment and our bankruptcy, financialadvisory, forensic accounting, and real estate consulting businesses that were previously reported in the Capital Markets segmentare now reported as a part of the Financial Consulting segment. In conjunction with the new reporting structure, the Company recastits segment presentation for all periods presented.
For financial reportingpurposes we classify our businesses into five operating segments: (i) Capital Markets, (ii) Auction and Liquidation, (iii) FinancialConsulting, (iv) Principal Investments – United Online and magicJack, and (v) Brands.
Capital MarketsSegment . Our Capital Markets segment provides a full array of investment banking, corporate finance, consulting, financialadvisory, research, securities lending, wealth management and sales and trading services to corporate, institutional and individualclients. Our corporate finance and investment banking services include merger and acquisitions as well as restructuring advisoryservices to public and private companies, initial and secondary public offerings, and institutional private placements. In addition,we trade equity securities as a principal for our account, including investments in funds managed by our subsidiaries. Our CapitalMarkets segment also includes our asset management businesses that manage various private and public funds for institutional andindividual investors.
Auction and LiquidationSegment. Our Auction and Liquidation segment utilizes our significant industry experience, a scalable network of independentcontractors and industry-specific advisors to tailor our services to the specific needs of a multitude of clients, logistical challengesand distressed circumstances. Furthermore, our scale and pool of resources allow us to offer our services across North Americanas well as parts of Europe, Asia and Australia. Our Auction and Liquidation segment operates through two main divisions, retailstore liquidations and wholesale and industrial assets dispositions. Our wholesale and industrial assets dispositions divisionoperates through limited liability companies that are controlled by us.
Financial ConsultingSegment. Our Financial Consulting segment provides services to law firms, corporations, financial institutions, lenders, andprivate equity firms. These services primarily include b ankruptcy, financialadvisory, forensic accounting, litigation support, real estate consulting and valuation and appraisal services . Our FinancialConsulting segment operates through limited liability companies that are wholly owned or majority owned by us.
Principal Investments- United Online and magicJack Segment. Our Principal Investments - United Online and magicJack segment consists of businesseswhich have been acquired primarily for attractive investment return characteristics. Currently, this segment includes UOL, throughwhich we provide consumer Internet access, and magicJack, through which we provide VoIP communication and related product and subscriptionservices.
Brands Segment. Our Brands segment consists of our brand investment portfolio that isfocused on generating revenue through the licensing of trademarks and is held by BR Brand.
Recent Developments
On March 1, 2021,the Company announced its intention to redeem at par, and at its option, $128.2 million of senior notes due in February 2027 (“7.50%2027 Notes”) on March 31, 2021 pursuant to the second supplemental indenture dated May 31, 2017. The total redemption paymentwill include approximately $1.6 million in accrued interest.
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On February 25, 2021,the Company completed the acquisition of National Holdings Corporation (“National”), pursuant to an agreement and planof merger dated January 10, 2021, following the successful completion of a tender offer commenced by us on January 27, 2021. Nationalis a full-service investment banking and asset management firm that, through its affiliates, provides a range of services includingfinancial advisory, investment banking, institutional sales and trading, equity research, financial planning, market making, taxpreparation and insurance to corporations, institutions, high net-worth individuals and retail investors. We previously owned approximately45% of the common stock of National. National complements our Capital Markets segment, bringing approximately 900 registered representativesmanaging over $30 billion in assets.
OnJanuary 25, 2021, the Company issued $230,000 of senior notes due in January 2028 (“6.0% 2028 Notes”) pursuant to theprospectus supplement dated February 12, 2020. Interest on the 6.0% 2028 Notes is payable quarterly at 6.0%. The 6.0% 2028 Notesare unsecured and due and payable in full on January 31, 2028 .In connection with the issuance of the 6.0% 2028 Notes, the Company received net proceeds of $225,746 (after underwriting commissions,fees and other issuance costs of $4,254).
On January 23, 2021, the Company committed up to $400,000,000aggregate principal amount of unsecured debt financing, consisting of $100,000 of secured debt financing, and $300,000,000 of unsecureddebt financing, to affiliates of Franchise Group, Inc. (collectively, “FRG”) in connection with FRG’s acquisitionof Pet Supplies Plus.
OnJanuary 15, 2021, the Company issued 1,413,045 shares of common stock inclusive of 184,310 shares issued pursuant to thefull exercise of the Underwriter’s option to purchase additional shares of common stock at a price of $46.00 per share fornet proceeds of approximately $61,370 after underwriting fees and costs.
On November 30, 2020we closed a recapitalization transaction with Lingo Management, LLC (“Lingo”), a global cloud/UC and managed serviceprovider. Pursuant to the recapitalization, B. Riley purchased Lingo’s existing indebtedness held by affiliates of GarrisonInvestment Group and converted a portion of such indebtedness into a 40% equity interest in Lingo with the ability to acquire anadditional 40% equity interest in consideration for the conversion of an additional portion of such indebtedness.
On January 30, 2020,the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus (the“COVID-19 outbreak”). In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on therapid increase in exposure globally. Coming into 2021, the full impact of the COVID-19 outbreak continues to evolve,as countries across the world manage repeated waves of the pandemic and vaccines come to market. The impact of the COVID-19outbreak on our results of operations, financial position and cash flows will depend on future developments, including the durationand spread of the outbreak and related advisories and restrictions and the success of vaccines in slowing or halting the pandemic. Thesedevelopments and the impact of the COVID-19 outbreak on the financial markets and the overall economy continue to be highly uncertainand cannot be predicted. If the financial markets and/or the overall economy continue to be impacted, our results of operations,financial position and cash flows may be materially adversely affected.
B. Riley Securities
InvestmentBanking and Corporate Finance
B. Riley Securities’investment banking professionals provide equity and debt capital raising, merger and acquisition, financial advisory and restructuringadvisory services to both private and publicly traded companies. Those services include follow-on public offerings, debt and equityprivate placements, debt refinancing, corporate debt and equity security repurchases, and buy-side and sell-side representation,divestitures/carveouts, leveraged buyouts, management buyouts, strategic alternatives reviews, fairness opinions, valuations, return-of-capitaladvisory, hostile/activist advisory, and options trading programs.
Sales, Trading andCorporate Services
Our sales and tradingprofessionals distribute B. Riley proprietary research products to our institutional investor clients and high net worth individuals.B. Riley Securities sales and trading also sells the securities of companies in which B. Riley Securities acts as an underwriterand executes equity trades on behalf of clients. We maintain active trading relationships with substantially all major institutionalmoney managers. Our equity and fixed income traders make markets in over 1,000 securities. B. Riley Securities also conductssecurities lending activities which involves the borrowing and lending of equity and fixed income securities. Our corporate servicesinclude retail orders, block trades, Rule 144 transactions, cashless exercise of options, and corporate equity repurchase programs.
EquityResearch
Our equity researchis focused on fundamentals-based research. Our research focuses on an in-depth analysis of earnings, cash flow trends, balancesheet strength, industry outlook, and strength of management that involves extensive meetings with key management, competitors,channel partners and customers. We provide research on all sizes of firms; however, our research primarily focuses on small andmid-cap stocks that are under-followed by Wall Street. Our analysts regularly communicate their findings through Research Updatesand daily Morning Notes.
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Our research departmentincludes research analysts maintaining coverage on a variety of companies in a variety of industry sectors. Our research departmentannually organizes non-deal road shows for issuers in our targeted industries.
Proprietary Trading
We engage in tradingactivities for strategic investment purposes (i.e. proprietary trading) utilizing the firm’s capital. Proprietary tradingactivities include investments in public and private stock and debt securities.
B. Riley Securitiesis reported in our Capital Markets segment for financial reporting purposes.
B. Riley Capital Management
We provide investmentmanagement services under our subsidiary, B. Riley Capital Management, LLC. The registered investment advisor manages private investmentfunds, including a fund of funds. All of the funds managed typically invest in both public and private equity and debt. Investorsin the various funds include institutional, high net worth, and individual investors. GACP is the general partner of GACP I, L.P.and GACP II, L.P., direct lending funds managed by WhiteHawk Capital Partners, L.P. pursuant to an investment advisory servicesagreement, that provide senior secured loans and second lien secured loan facilities to middle market public and private U.S. companies.
B. Riley Capital Managementis reported in our Capital Markets segment for financial reporting purposes.
B. Riley Wealth Management
Wealth Management
B. Riley Wealth Managementprovides comprehensive wealth management and brokerage services to individuals and families, corporations and non-profit organizations,including qualified retirement plans, trusts, foundations and endowments. Our financial advisors provide a broad range of investmentsand services to our clients, including financial planning services. Wunderlich Securities, Inc. (“Wunderlich”) wasestablished in 1996 and headquartered in Memphis, Tennessee. Wunderlich became a wholly-owned subsidiary of B. Riley Financial,Inc., in July 2017 and its operations are included in our Capital Markets segment. In June 2018, Wunderlich changed its name toB. Riley Wealth Management, Inc.
B. Riley Advisory Services
Financial AdvisoryServices
B. Riley AdvisoryServices provides consulting services to shareholders, creditors and companies which includes expert witness, bankruptcy, duediligence, financial advisory, forensic accounting, litigation support, and crisis management. These services are primarily composed of the former Glass Ratner business.
The financial advisoryservices business of B. Riley Advisory Services compliments the restructuring services provided by B. Riley Securities.
The financial advisoryservices business of B. Riley Advisory Services is reported in our Financial Consulting segment for financial reporting purposes.
Valuation and Appraisal
Our appraisal teamsprovide independent appraisals to financial institutions, lenders, private equity firms and other providers of capital for estimatedliquidation values of assets. These teams include experts specializing in particular industry niches and asset classes. We providevaluation and appraisal services across five general categories:
Consumer and RetailInventory. Representative types of appraisals and valuations include inventory of specialty apparel retailers, department stores,jewelry retailers, sporting goods retailers, mass and discount merchants, home furnishing retailers and footwear retailers.
Wholesale and IndustrialInventory. Representative types of appraisals and valuations include inventory held by manufacturers or distributors of automotiveparts, chemicals, food and beverage products, wine and spirits, building and construction products, industrial products, metals,paper and packaging.
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Machinery and Equipment. Representative types of asset appraisals and valuations include a broad range of equipment utilized in manufacturing, construction,transportation and healthcare.
Intangible Assets. Representative types of asset appraisals and valuations include intellectual property, goodwill, brands, logos, trademarks andcustomer lists.
We provide valuationand appraisal services on a pre-negotiated flat fee basis.
The valuation andappraisal services business of B. Riley Advisory Services described above is reported in our Financial Consulting segment for financialreporting purposes.
Operations ManagementServices
Our Operations ManagementServices teams work with companies to fix troubled operations by improving their profitability, cash flow and enterprise value.Focus areas include due diligence, acquisitions, executive management, launch coordination, lean six sigma design and implementation,purchasing and inventory management, and quality systems. These services are reported in our Financial Consulting segment for financialreporting purposes.
B. Riley Retail Solutions (fka GreatAmerican Group)
Retail Store Liquidationsand Wholesale and Industrial Liquidations
We enable our clientsto quickly and efficiently dispose of under-performing assets and generate cash from excess inventory by conducting or assistingin retail store closings, going out of business sales, bankruptcy sales and fixture sales. Financial institution and other capitalproviders rely on us to maximize recovery rates in distressed asset sales and in retail bankruptcy situations. Additionally, healthy,mature retailers utilize our proven inventory management and strategic disposition solutions, relying on our extensive networkof retail professionals, to close unproductive stores and dispose of surplus inventory and fixtures as existing stores are updated.
Weoften conduct large retail liquidations that entail significant capital requirements through collaborative arrangements with otherliquidators. By entering into an agreement with one or more collaborators, we are able to bid on larger engagements that we couldnot conduct on our own due to the significant capital outlay involved, number of independent contractors required or financialrisk associated with the particular engagement. We act as the lead partner in many of the collaborative arrangements that we enterinto, meaning that we have primary responsibility for the due diligence, contract negotiation and execution of the engagement.
We design and implementcustomized disposition programs for our clients seeking to convert excess wholesale and industrial inventory and operational assetsinto capital. We dispose of a wide array of assets including, among others, equipment related to transportation, heavy mobile construction,energy exploration and services, metal fabrication, food processing, semiconductor fabrication, and distribution services. We manageprojects of all sizes and scopes across a variety of asset categories. We believe that our databases of information regarding potentialbuyers that we have collected from past transactions and engagements, our nationwide name recognition and experience with alternativedistribution channels allow us to provide superior wholesale and industrial disposition services.
B. Riley Retail Solutionsprovides the foregoing services to clients on a guarantee, fee or outright purchase basis.
Guarantee . When providing services on a guarantee basis, we guarantee the client a specific recovery often expressed as a percentage of retailinventory value or wholesale inventory cost or, in the case of machinery or equipment, a set dollar amount. This guarantee is oftenrequired to be supported by a letter of credit, a cash deposit or a combination thereof. Cash deposits are typically funded inpart with available cash together with short term borrowings under our credit facilities. Often when we provide auction or liquidationservices on a guarantee basis, we do so through a collaborative arrangement with other service providers. In this situation, eachcollaborator agrees to provide a certain percentage of the guaranteed amount to the client through a combination of letters ofcredit, cash and financing. If we are engaged individually, we receive 100% of the net profit, less debt financing fees, sale relatedexpenses (if any) and any share of the profits due to the client as a result of any profit sharing arrangement entered into basedon a pre-negotiated formula. If the engagement was conducted through a collaborative arrangement, the profits or losses are dividedamong us and our partner or partners as set forth in the agreement governing the collaborative arrangement. If the net sales proceedsafter expenses are less than the guarantee, we, together with our partners if the engagement was conducted through a collaborativearrangement, are responsible for the shortfall and will recognize a loss on the engagement.
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Fee. When weprovide services on a fee basis, clients pay a pre-negotiated flat fee for the services provided, a percentage of asset sales generatedor a combination of both.
Outright Purchase. When providing services on an outright purchase basis, we purchase the assets from the client and typically sell them at auction,orderly liquidation, through a third-party broker or, less frequently, as augmented inventory in conjunction with another liquidationthat we are conducting. In an outright purchase, we take, together with any collaboration partners, title to the assets and absorbthe profit or loss associated with the asset disposition.
Theretail store liquidations and wholesale and industrial asset dispositions business of B. Riley Retail Solutions described aboveis reported in our Auction and Liquidation segment for financial reporting purposes.
B. Riley Real Estate
We work with real estateowners and tenants through all stages of the real estate life cycle. Our real estate advisors advise companies, financial institutions,investors, family offices and individuals on real estate projects worldwide.
Acquisitions andSales
We engage in a varietyof acquisition strategies, including purchasing real estate and mortgages. We provide equity and “rescue” capital andparticipate in joint ventures.
Auctions
As bankruptcy auctionprofessionals, we represent debtors in lease restructuring and renegotiations and the sale of real property.
Financial AdvisoryServices
We represent stakeholdersin out-of-court restructurings, loan sales, lease renegotiation and restructuring, strategic investing and managing difficult refinancingtransactions.
Liquidationsand Loan Sales
We execute real estateliquidations and loan sale transactions in various market segments on both the “buy” side and the “sell”side.
Principal Investmentsand Financing
We maintain strategicrelationships with institutional investors and high net worth clients that are seeking real estate investments that are opportunistic,value-added and traditional. Our strategic partners look to us to identify, underwrite, structure and close these principal investmenttransactions.
B. Riley Real Estateservices described above is reported in our Financial Consulting segment for financial reporting purposes.
B. Riley Principal Investments
Principal Investments
B. Riley PrincipalInvestments identifies attractive investment opportunities and aims to deliver financial and operational improvement to itsportfolio companies. Our team concentrates on opportunities presented by distressed companies or divisions that exhibitchallenging market dynamics. Representative transactions include recapitalization, direct equity investment, debt investment,active minority investment and buyouts. B. Riley Principal Investments seeks to control or influence the operations of ourinvestments to deliver financial and operational improvements that will maximize free cash flow, and therefore, shareholderreturns.
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Venture Capital
B. Riley Venture Capitalinvests in late-stage private growth companies with a path towards public markets. We are not a venture fund; rather, investmentsare made off-balance sheet and syndicated across our institutional, banking and retail client base.
United Online andmagicJack
We acquired UOL on July1, 2016 and magicJack on November 14, 2018 as part of our principal investment strategy. UOL’s primary pay service is Internetaccess, offered under the NetZero and Juno brands. Internet access includes dial-up service, mobile broadband and DSL. magicJackis a VoIP cloud-based technology and services communications provider and the inventor of the magicJack devices.
Internet Access
Our Internet accessservices consist of dial-up, mobile broadband and, to a much lesser extent, DSL services. Our dial-up Internet access servicesare provided on both a free and pay basis, with the free services subject to hourly and other limitations. Basic pay dial-up Internetaccess services include accelerated dial-up Internet access and an email account. Our Internet access services are also bundledwith additional benefits, including antivirus software and enhanced email storage, although we also offer each of these featuresand certain other value-added features as stand-alone pay services. We offer mobile broadband devices for sale in connection withour mobile broadband services. We also generate revenues from the resale of telecommunications to third parties. Over the pastseveral years revenues from paid subscription services have declined year over year as a result of a decline in the number of paidsubscribers for our services. Management believes the decline in paid subscriber accounts is primarily attributable to the industrytrends of consumers switching from dial-up Internet access to high speed Internet access such as cable and DSL. Management expectsrevenues in the Principal Investments - United Online and magicJack segment to continue to decline year over year.
magicJack Devices
The magicJack is a VoIPdevice weighing about one ounce which includes an initial access right period. Customers receive free VoIP phone service for theirhome, enterprise or while traveling. The initial access right period for the different versions ranges from three to twelve months.The current device available for purchase is the magicJack GO, which includes a twelve month access right period. magicJack devicesare sold either directly to customers through our website or through retailers.
Mobile apps
The Company also offersmagicJack mobile apps, which are applications that allow users to make and receive telephone calls through their smart phones ordevices. The mobile apps allow customers to place and receive telephone calls in the U.S. or Canada on their mobile devices througheither an existing or new magicJack account. The mobile apps also give users the ability to add a second phone number to theirsmart phone for a monthly or annual fee. Customers may purchase international minutes to place telephone calls through the magicJackdevice or mobile apps to locations outside of the U.S. and Canada.
Access Right Renewals
Customers who own amagicJack device or mobile app may renew access rights for periods ranging from one month to five years.
Other magicJack-RelatedProducts
The Company offers customersother optional products related to their magicJack devices and services, such as custom or vanity phone numbers, Canadian phonenumbers and the ability to either change their existing phone numbers or port them to a magicJack device.
Prepaid Minutes
The Company’scustomers can purchase international minutes on a prepaid basis.
Access and WholesaleCharges
The Company generatesrevenues from access fees charged to other carriers, as well as wholesaling telephone service to VoIP providers and telecommunicationcarriers.
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UCaaS Services andEquipment
The Company providedhosted communication services and sold hardware and network equipment that are compatible with the service, through its subsidiary,Broadsmart, which was sold during 2019.
Advertising and otherrevenue
Advertising and otherrevenues are primarily derived from various advertising, marketing and media-related initiatives. The majority of our advertisingand other revenues include advertising revenues from search placements, display advertisements and online market research associatedwith our Internet access and email services.
Brands
Ourbrand investment portfolio focuses on generating revenue through the licensing of trademarks. T heCompany holds a majority ownership interest in BR Brands, which owns the assets and intellectual property related to licenses ofsix brands: Catherine Malandrino, English Laundry, Joan Vass, Kensie Girl, Limited Too and Nanette Lepore as well as investmentsin the Hurley and Justice brands with Bluestar. The Company intends to grow licensing revenue from the brand holdings in partnershipwith Bluestar by leveraging its extensive relationships and strategic partnerships in the retail sector. The Company intends topursue future acquisitions of consumer brands, intellectual property, trademarks and licenses, and participate in select transactionsas an equity owner.
Customers
We serve retail, corporate,capital provider and individual customers across our services lines. The services provided to these customers were under short-termliquidation contracts that generally do not exceed a period of six months. There were no recurring revenues from year-to-year inconnection with the services we performed under these contracts.
B. Riley Securities
We are engaged bycorporate customers, including publicly held and privately owned companies, to provide investment banking, corporate finance, restructuringadvisory, research and sales and trading services. We also provide corporate finance, research, wealth management, and sales andtrading services to high net worth individuals. We maintain client relationships with companies in the consumer goods, industrials,energy, financial services, healthcare, real estate, strategy, and technology industries.
B. RileyCapital Management
Investors in the variousfunds of B. Riley Capital Management include institutional, high net worth, and individual investors.
B. RileyWealth Management
We act as financialwealth management advisors to individuals, families, small businesses, non-profit organizations, and qualified retirement plans.Our investment services are primarily comprised of asset management services to meet the financial plans, financial goals and needsof our customers. We service our customers through a network of 18 branch offices located in 12 states primarily located in theMid-west and Southern section of the United States.
B. Riley AdvisoryServices
We provide specialtyfinancial advisory services to companies, shareholders, creditors and investors on complex business problems and critical boardlevel agenda items including transaction advisory and due diligence, fraud investigations, corporate litigation, business valuations,crisis management and bankruptcy. We provide bankruptcy and restructuring services, forensic accounting and litigation support,valuation services, and real estate consulting. Additionally, we are engaged by financial institutions, lenders, private equityfirms and other capital providers, as well as professional service providers, to provide valuation and appraisal services. We haveextensive experience in the appraisal and valuation of retail and consumer inventories, wholesale and industrial inventories, machineryand equipment, intellectual property and real estate.
B. RileyRetail Solutions
Our retail Auctionand Liquidation clients include financially healthy retailers as well as distressed retailers, bankruptcy professionals, financialinstitution workout groups and a wide range of professional service providers. Some retail segments in which we specialize includeapparel, arts and crafts, department stores, discount stores, drug / health and beauty, electronics, footwear, grocery stores,hardware / home improvement, home goods and linens, jewelry, office / party supplies, specialty stores, and sporting goods. Wealso provide wholesale and industrial auction services and customized disposition programs to a wide range of clients.
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B. RileyReal Estate
Our RealEstate clients include real property owners and tenants in a wide variety of sectors and include both healthy and distressed businesses.
B. Riley PrincipalInvestments
B. RileyPrincipal Investments serves businesses seeking capital investment, including debt or equity financing.
UnitedOnline
Our Internet accessservices are available to customers, which are primarily comprised of individuals, in more than 12,000 cities across the U.S. andCanada. Generally, our Internet access customers also subscribe to value-added features that include antivirus software and enhancedemail storage. Our advertising customers primarily include business customers that market products and services over the Internet.
magicJack
magicJack providescomplete phone service for home, enterprise and while traveling for retailers, wholesalers or directly to customer over the periodassociated with the access right period. The Company provides customers with an ability to make and receive telephone calls throughtheir smart phones, add a second phone number to their smart phone and purchase prepaid minutes to place telephone calls throughthe magicJack device or mobile apps to locations outside of the U.S. and Canada.
Brands
Ourbrand investment portfolio focuses on generating revenue through the licensing of trademarks. T heCompany holds a majority ownership interest in BR Brand, which owns the assets and intellectual property related to licenses ofsix brands: Catherine Malandrino, English Laundry, Joan Vass, Kensie Girl, Limited Too and Nanette Lepore as well as an investmentin the Hurley Brand with Bluestar Alliance LLC (“Bluestar”). The Company intends to grow licensing revenue from thebrand holdings in partnership with Bluestar by leveraging its extensive relationships and strategic partnerships in the retailsector. The Company intends to pursue future acquisitions of consumer brands, intellectual property, trademarks and licenses, andparticipate in select transactions as an equity owner.
Competition
B. Riley Securities,B. Riley Capital Management, B. Riley Wealth Management and B. Riley Advisory Services
We face intense competitionfor our Capital Markets services. Since the mid-1990s, there has been substantial consolidation among U.S. and global financialinstitutions. In particular, a number of large commercial banks, insurance companies and other diversified financial services firmshave merged with other financial institutions or have established or acquired broker-dealers. During 2008, the failure or near-collapseof a number of very large financial institutions led to the acquisition of several of the most sizeable U.S. investment bankingfirms, consolidating the financial industry to an even greater extent. Currently, our competitors are other investment banks, bankholding companies, brokerage firms, merchant banks and financial advisory firms. Our focus on our target industries also subjectsus to direct competition from a number of specialty securities firms and smaller investment banking boutiques that specialize inproviding services to these industries.
The industry trendtoward consolidation has significantly increased the capital base and geographic reach of many of our competitors. Our larger andbetter-capitalized competitors may be better able than we are to respond to changes in the investment banking industry, to recruitand retain skilled professionals, to finance acquisitions, to fund internal growth and to compete for market share generally. Manyof these firms have the ability to offer a wider range of products than we do, including loans, deposit-taking and insurance, inaddition to brokerage, asset management and investment banking services, all of which may enhance their competitive position relativeto us. These firms also have the ability to support investment banking and securities products with commercial banking, insuranceand other financial services revenues in an effort to gain market share, which could result in downward pricing pressure in ourbusinesses. In particular, the trend in the equity underwriting business toward multiple book runners and co-managers has increasedthe competitive pressure in the investment banking industry and has placed downward pressure on average transaction fees.
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As we seek to expandour asset management business, we face competition in the pursuit of investors for our investment funds, in the identificationand completion of investments in attractive portfolio companies or securities, and in the recruitment and retention of skilledasset management professionals.
Other BusinessLines
We also face intensecompetition in our other service areas. While some competitors are unique to specific service offerings, some competitors crossmultiple service offerings. A number of companies provide services or products to the Retail Solutions and real estate markets,and existing and potential clients can, or will be able to, choose from a variety of qualified service providers. Some of our competitorsmay even be able to offer discounts or other preferred pricing arrangements. In a cost-sensitive environment, such arrangementsmay prevent us from acquiring new clients or new engagements with existing clients. Some of our competitors may be able to negotiatesecure alliances with clients and affiliates on more favorable terms, devote greater resources to marketing and promotional campaignsor to the development of technology systems than us. In addition, new technologies and the expansion of existing technologies withrespect to the online auction business may increase the competitive pressures on us. We must also compete for the services of skilledprofessionals. There can be no assurance that we will be able to compete successfully against current or future competitors, andcompetitive pressures we face could harm our business, operating results and financial condition.
We face competitionfor our retail services from traditional liquidators as well as Internet-based liquidators such as overstock.com and eBay. Ourwholesale and industrial services competitors include traditional auctioneers and fixed site auction houses that may specializein particular industries or geographic regions as well as other large, prestigious or well-recognized auctioneers. We also facecompetition and pricing pressure from the internal remarketing groups of our clients and potential clients and from companies thatmay choose to liquidate or auction assets and/or excess inventory without assistance from service providers like us. We face competitionfor our Retail Solutions businesses from large accounting, consulting and other professional service firms as well as other valuation,financial consulting and advisory firms. We face competition for our Real Estate Services from large real estate brokerage andadvisory firms.
United Online
The U.S. market forInternet and broadband services is highly competitive. We compete with numerous providers of broadband services, as well as otherdial-up Internet access providers. Our principal competitors for broadband services include, among others, local exchange carriers,wireless and satellite service providers, cable service providers, and broadband resellers. These competitors include establishedproviders such as AT&T, Verizon, Sprint and T-Mobile. Our principal dial-up Internet access competitors include establishedonline service and content providers, such as AOL and MSN, and independent national Internet service providers, such as EarthLink.We believe the primary competitive factors in the Internet access industry are speed, price, coverage area, ease of use, scopeof services, quality of service, and features. Our dial-up Internet access services do not compete favorably with broadband serviceswith respect to certain of these factors, including, but not limited to, speed.
magicJack
The principal competitorsfor our products and services include the traditional telephone service providers, such as AT&T, Inc., CenturyLink, Inc. andVerizon Communications Inc., which provide telephone service using the public switched telephone network. Certain of these traditionalproviders have also added, or are planning to add, broadband telephone services to their existing telephone and broadband offerings.We also face, or expect to face, competition from cable companies, such as Cablevision Systems Corp., Charter Communications, Inc.,Comcast Corporation, Cox Communications, Inc. and Time Warner Cable (a division of Time Warner Inc.), which offer broadband telephoneservices to their existing cable television and broadband offerings. Further, wireless providers, including AT&T Mobility,Inc., Sprint Corporation, T-Mobile USA Inc., and Verizon Wireless, Inc. offer services that some customers may prefer over wireline-basedservice. In the future, as wireless companies offer more minutes at lower prices, their services may become more attractive tocustomers as a replacement for broadband or wireline-based phone service.
We face competitionon magicJack device sales from Apple, Samsung, Motorola and other manufacturers of smart phones, tablets and other handheld wirelessdevices. Also, we compete against established alternative voice communication providers, such as Vonage, Google Voice, Ooma, andSkype, which is another non-interconnected voice provider, and may face competition from other large, well-capitalized Internetcompanies. In addition, we compete with independent broadband telephone service providers.
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Brands
Our brand investmentportfolio competes with companies that own other brands and trademarks, as these companies could enter into similar licensing arrangementswith retailers and wholesalers in the United States and internationally. These arrangements could be with our existing retail andwholesale partners, thereby competing with us for consumer attention and limited floor or rack space in the same stores in whichour branded products are sold and vying with us for the time and resources of the retailers and wholesale licensees that manufactureand distribute our products. These companies may be able to respond more quickly to changes in retailer, wholesaler and consumerpreferences and devote greater resources to brand acquisition, development and marketing. We may not be able to compete effectivelyagainst these companies.
Regulation
We are subject tofederal and state consumer protection laws, including regulations prohibiting unfair and deceptive trade practices. In addition,numerous states and municipalities regulate the conduct of auctions and the liability of auctioneers. We and/or our auctioneersare licensed or bonded in the following states where we conduct, or have conducted, retail, wholesale or industrial asset auctions:California, Florida, Georgia, Illinois, Massachusetts, Ohio, South Carolina, Texas, Virginia and Washington. In addition, we arelicensed or obtain permits in cities and/or counties where we conduct auctions, as required. If we conduct an auction in a statewhere we are not licensed or where reciprocity laws do not exist, we will work with an auctioneer of record in such state. We and/orour real estate professionals are licensed in Illinois, California, Florida and Georgia. When we conduct real estate activitiesthat require licensure in a state where we are not licensed or where reciprocity laws do not exist, we will work with a brokerof record in such state.
As a participant inthe financial services industry, we are subject to complex and extensive regulation of most aspects of our business by U.S. federaland state regulatory agencies, self-regulatory organizations and securities exchanges. The laws, rules and regulations comprisingthe regulatory framework are constantly changing, as are the interpretation and enforcement of existing laws, rules and regulations.The effect of any such changes cannot be predicted and may direct the manner of our operations and affect our profitability.
B. Riley Securitiesand B. Riley Wealth Management, our broker-dealer subsidiaries, are subject to regulations governing every aspect of the securitiesbusiness, including the execution of securities transactions; capital requirements; record-keeping and reporting procedures; relationshipswith customers, including the handling of cash and margin accounts; the experience of and training requirements for certain employees;and business interactions with firms that are not members of regulatory bodies.
B. Riley Securitiesand B. Riley Wealth Management are registered as securities broker-dealers with the SEC and are members of FINRA. FINRA is a self-regulatorybody composed of members such as our broker-dealer subsidiaries that have agreed to abide by the rules and regulations of FINRA.FINRA may expel, fine and otherwise discipline member firms and their employees. B. Riley Securities and B. Riley Wealth Managementare licensed as broker-dealers in all 50 states in the U.S., requiring us to comply with the laws, rules and regulations of eachsuch state. Each state may revoke the license to conduct securities business, fine and otherwise discipline broker-dealers andtheir employees. We are also registered with NASDAQ and must comply with its applicable rules.
B. Riley Securitiesand B. Riley Wealth Management are also subject to the SEC’s Uniform Net Capital Rule, Rule 15c3-1, which may limit our abilityto make withdrawals of capital from our broker-dealer subsidiaries. The Uniform Net Capital Rule sets the minimum level of netcapital a broker-dealer must maintain and also requires that a portion of its assets be relatively liquid. In addition, B. RileySecurities and B. Riley Wealth Management are subject to certain notification requirements related to withdrawals of excess netcapital.
We are also subjectto the USA PATRIOT Act of 2001 (the Patriot Act), which imposes obligations regarding the prevention and detection of money-launderingactivities, including the establishment of customer due diligence and customer verification, and other compliance policies andprocedures. The conduct of research analysts is also the subject of rule-making by the SEC, FINRA and the federal government throughthe Sarbanes-Oxley Act. These regulations require certain disclosures by, and restrict the activities of, research analysts andbroker-dealers, among others. Failure to comply with these requirements may result in monetary, regulatory and, in the case ofthe USA Patriot Act, criminal penalties.
Our asset managementsubsidiaries, B. Riley Capital Management, LLC and B. Riley Wealth Management, are SEC-registered investment advisers, and accordinglysubject to regulation by the SEC. Requirements under the Investment Advisors Act of 1940 include record-keeping, advertising andoperating requirements, and prohibitions on fraudulent activities.
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UOL is subject toa number of international, federal, state, and local laws and regulations, including, without limitation, those relating to taxation,bulk email or “spam,” advertising, user privacy and data protection, consumer protection, antitrust, export, and unclaimedproperty. In addition, proposed laws and regulations relating to some or all of the foregoing, as well as to other areas affectingour businesses, are continuously debated and considered for adoption in the U.S. and other countries, and such laws and regulationscould be adopted in the future. For additional information, see “Risk Factors,” which appears in Item 1A of this AnnualReport on Form 10-K.
In the United States,magicJack is subject to federal regulation under the rules and regulations of the Federal Communications Commission (“FCC”or the “Commission”) and various state and local regulations. magicJack provides broadband telephone services usingVoIP technology and/or services treated as information services by the FCC. magicJack is also licensed as a Competitive Local ExchangeCarrier (“CLEC”) and is subject to extensive federal and state regulation applicable to CLECs. The FCC has to dateasserted limited statutory jurisdiction and regulatory authority over the operations and offerings of certain providers of broadbandtelephone services, including non-interconnected VoIP. FCC regulations may now, or may in the future, be applied to magicJack’sbroadband telephone operations. Other FCC regulations apply to magicJack because it provides international calling capability.Some of the magicJack’s operations are also subject to regulation by state public utility commissions.
Human Capital
As of December 31,2020, we had 996 full time employees who comprise diverse a team, including seasoned experts in our various lines of business. Since ourinception, our human capital focus has been to gather top talent, with the expertise to lead in every sector, creating agroup of collaborative, innovative and independent thinkers who adopt a unique approach to serving our clients and customers.Management appreciates, and never takes for granted, that without the expertise and dedication of our talented professionals,our firm would cease to exist. In that regard, we are dedicated to our people above all else. We have made a commitment toprovide the direction, support and resources needed for our team members to succeed both professionally and personally.
An entrepreneurialspirit is the epitome of the B. Riley culture. We thrive in a collaborative environment and our culture is one that empowersthe individual to grow and succeed through mentorship and that celebrates successes. We work to attract talent that will meshwith our entrepreneurial, collaborative, and fast-passed environment. Junior staff members have a unique opportunity to learnat a rapid pace from accessible leaders who are all recognized experts across several practices and sectors.
In 2019, we launched our Ambassador programto help build intra and inter-organizational relationships, facilitate collaborative knowledge sharing, and to identify and supportemerging leaders. Each of our major functional groups hand-pick rising stars to serve as the “face”of that group. Ambassadors are selected based on their demonstration that they are highly motivated for growth at the firm. Thisleadership development program is one example of how we work to provide development opportunities to our employees and expand theirnetworks within the B. Riley platform.
We strive to attract a diverse group of candidates within ourfirm and support the expansion of diversity within the industries in which we operate. By participating in targeted job fairs andsimilar events we seek out diverse talent to recruit to our firm. We partner with a nonprofit foundation to develop industry educationprograms that support developing diverse leaders as they prepare to embark upon their careers, and we look forward to expandingour efforts.
We offer competitive compensation and benefitsto support our employees’ wellbeing and reward strong performance. Our pay for performance compensation philosophy is designedto reward employees for achievement and to align employee interests with the firm’s long-term growth. Our benefits programincludes healthcare, wellness initiatives, retirement offerings, paid time off and flexible leave arrangements. We also offer allemployees access to our employee assistance program, and support flexible employment arrangements, such as remote work that empowerindividuals to pursue a work/life balance model that provides personal flexibility while supporting high level of productivityand client service.
Workplace health andsafety is a vital aspect of running our business. We believe that safety must always be an integral part of any function or serviceperformed, and the protection of our employees, visitors and event attendees is our utmost priority. We have a business continuityplan in place that allow us to respond to threats to our health and safety, while ensuring that we cancontinue to provide quality service to our clients and shareholders at all times. During the COVID-19 pandemic that erupted inearly 2020, we adopted a work-from-home policy for our professionals designed to safeguard our employees’ health and safetywithout a disruption to client service.
Available Information
Wewere incorporated in Delaware in May 2009. We maintain a website at www.brileyfin.com . The information on our website isnot a part of, or incorporated in, this Annual Report. We file annual reports on Form 10-K, quarterly reports on Form 10-Q, currentreports on Form 8-K, proxy and information statements, among other reports and filings, with the SEC, and make available, freeof charge, on or through our website, such reports and filings and amendments thereto filed or furnished pursuant to Section 13(a)or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonably practicableafter we electronically file such material with, or furnish it to, the SEC. The public may obtain copies of these reports andfilings and any amendments thereto at the SEC’s Internet site, www.sec.gov . Our Board has adopted a Code ofBusiness Conduct and Ethics that applies to all of our directors, officers and employees. The Code of Business Conduct and Ethicsis available for review on our website at http://ir.brileyfin.com/corporate-governance . Each of our directors, employeesand officers, including our Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, and all of our otherprincipal executive officers, are required to comply with the Code of Business Conduct and Ethics. Anychanges to or waiver of our Code of Business Conduct and Ethics for senior financial officers, executive officers or Directorswill be posted on that website.
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Item 1A. Risk Factors.
Given thenature of our operations and services we provide, and as described in more detail below, a wide range of factors could materiallyaffect our operations and profitability. The risks and uncertainties described below are not the only risks and uncertainties facingus. Additional risks and uncertainties not presently known or that are currently considered to be immaterial may also materiallyand adversely affect our business operations or stock price.
Summary Risk Factors
Some of the factorsthat could materially and adversely affect our business, financial condition, results of operations and cash flows include, butare not limited to, the following:
| ● | Our revenues and results of operations are volatile and difficult to predict. |
| ● | Conditions in the financial markets and general economic conditions, including the ongoing COVID-19pandemic, have impacted and may continue to impact our ability to generate business and revenues, which may cause significant fluctuationsin our stock price. |
| ● | Our exposure to legal liability is significant and could lead to substantial damages. |
| ● | Financial services firms have been subject to increased scrutiny over the last several years, increasingthe risk of financial liability and reputational harm resulting from adverse regulatory actions. |
| ● | Our failure to maintain effective internal control over financial reporting in accordance withSection 404 of the Sarbanes-Oxley Act could have a material adverse effect on our financial condition, results of operations andbusiness and the price of our common stock and other securities. |
| ● | We may enter into new lines of business, make strategic investments or acquisitions or enter intojoint ventures, each of which may result in additional risks and uncertainties for our business. |
| ● | Our corporate finance and strategic advisory engagements are singular in nature and do not generally provide for subsequentengagements. |
| ● | We have made and may make Principal Investments in relatively high-risk, illiquid assets that often have significantly leveragedcapital structures, and we may fail to realize any profits from these activities for a considerable period of time or lose someor all of the principal amount we invest in these activities. |
| ● | We are exposed to credit risk from a variety of our activities, including loans, lines of credit, guarantees and backstop commitments,and we may not be able to fully realize the value of the collateral securing certain of our loans. |
| ● | We may incur losses as a result of “guarantee” based engagements that we enter into in connection with our Auctionand Liquidation solutions business. |
| ● | We depend on financial institutions as primary clients for our Financial Consulting business. Consequently,the loss of any financial institutions as clients may have an adverse impact on our business. |
| ● | The asset management business is intensely competitive. |
| ● | Poor investment performance may decrease assets under management and reduce revenues from and the profitability of our assetmanagement business. |
| ● | UOL competes against large companies, many of whom have significantly more financial and marketing resources, and our businesswill suffer if we are unable to compete successfully. |
| ● | Dial-up and DSL pay accounts may decline faster than expected and adversely impact our business. |
| ● | magicJack may face difficulty in attracting new customers, and if we fail to attract new customers, our business and resultsof operations may suffer. |
| ● | magicJack’s products must comply with various domestic and international regulations and standards and failure to doso could have an adverse effect on our business, operating results and financial condition. |
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| ● | magicJack’s emergency and E911 calling services are different from those offered by traditional wireline telephone companiesand may expose us to significant liability. |
| ● | The failure of our licensees to sell products that generate royalties to us, to pay us royalties pursuant to their licenseagreements with us, or to renew these agreements could negatively affect our results of operations and financial condition. |
| ● | We operate in highly competitive industries. Some of our competitors may have certain competitive advantages, which may causeus to be unable to effectively compete with or gain market share from our competitors. |
| ● | Security breaches and other disruptions could compromise our information and expose us to liability, which would cause ourbusiness and reputation to suffer. |
| ● | Anti-takeover provisions under our charter documents and Delaware law could delay or prevent a change of control and couldalso limit the market price of our stock. |
| ● | Because of their significant stock ownership, some of our existing stockholders will be able to exert control over us and oursignificant corporate decisions. |
| ● | Our common stock price may fluctuate substantially, and your investment could suffer a decline in value. |
| ● | We may not pay dividends regularly or at all in the future. |
| ● | Our level of indebtedness, and restrictions under such indebtedness, could adversely affect our operations and liquidity. |
Risks Related to Global and EconomicConditions
Our revenues and results of operationsare volatile and difficult to predict.
Our revenues and resultsof operations fluctuate significantly from quarter to quarter, due to a number of factors. These factors include, but are not limitedto, the following:
| ● | Our ability to attract new clients and obtain additional business from our existing client base; | |
| ● | The number, size and timing of mergers and acquisition transactions, capital raising transactions and other strategic advisory services where we act as an adviser on our Auction and Liquidation and investment banking engagements; | |
| ● | The extent to which we acquire assets for resale, or guarantee a minimum return thereon, and our ability to resell those assets at favorable prices; | |
| ● | Variability in the mix of revenues from the Auction and Liquidation and Financial Consulting businesses; | |
| ● | The rate of decline we experience from our dial-up and DSL Internet access pay accounts in our UOL business as customers continue to migrate to broadband access which provides faster Internet connection and download speeds offered by our competitors; | |
| ● | The rate of growth of new service areas; | |
| ● | The types of fees we charge clients, or other financial arrangements we enter into with clients; and | |
| ● | Changes in general economic and market conditions, including the effects of the ongoing COVID-19 pandemic, or an outbreak of another highly infectious or contagious disease. |
We have limited or nocontrol over some of the factors set forth above and, as a result, may be unable to forecast our revenues accurately. For example,our investment banking revenues are typically earned upon the successful completion of a transaction, the timing of which is uncertainand beyond our control. A client’s acquisition transaction may be delayed or terminated because of a failure to agree uponfinal terms with the counterparty, failure to obtain necessary regulatory consents or board or stockholder approvals, failure tosecure necessary financing, adverse market conditions or unexpected financial or other problems in the business of a client ora counterparty. If the parties fail to complete a transaction on which we are advising or an offering in which we are participating,we will earn little or no revenue from the contemplated transaction.
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We rely on projectionsof revenues in developing our operating plans for the future and will base our expectations regarding expenses on these projectionsand plans. If we inaccurately forecast revenues and/or earnings, or fail to accurately project expenses, we may be unable to adjustour spending in a timely manner to compensate for these inaccuracies and, as a result, may suffer operating losses and such lossescould have a negative impact on our financial condition and results of operations. If, for any reason, we fail to meet company,investor or analyst projections of revenue, growth or earnings, the market price of the common stock could decline and you maylose all or part of your investment.
Conditions inthe financial markets and general economic conditions, including the ongoing COVID-19 pandemic, have impacted and may continueto impact our ability to generate business and revenues, which may cause significant fluctuations in our stock price.
| ● | Our opportunity to act as underwriter or placement agent could be adversely affected by a reduction in the number and size of capital raising transactions or by competing sources of equity. |
| ● | The number and size of mergers and acquisitions transactions or other strategic advisory services where we act as adviser could be adversely affected by continued uncertainties in valuations related to asset quality and creditworthiness, volatility in the equity markets, and diminished access to financing. |
| ● | Market volatility could lead to a decline in the volume of transactions that we execute for our customers and, therefore, to a decline in the revenue we receive from commissions and spreads. |
| ● | We may experience losses in securities trading activities, or as a result of write-downs in the value of securities that we own, as a result of deteriorations in the businesses or creditworthiness of the issuers of such securities. |
| ● | We may experience losses or write downs in the realizable value of our proprietary investments due to the inability of companies we invest in to repay their borrowings. |
| ● | Our access to liquidity and the capital markets could be limited, preventing us from making proprietary investments and restricting our sales and trading businesses. |
| ● | We may incur unexpected costs or losses as a result of the bankruptcy or other failure of companies for which we have performed investment banking services to honor ongoing obligations such as indemnification or expense reimbursement agreements. |
| ● | Sudden sharp declines in market values of securities can result in illiquid markets and the failure of counterparties to perform their obligations, which could make it difficult for us to sell securities, hedge securities positions, and invest funds under management. |
| ● | As an introducing broker to clearing firms, we are responsible to the clearing firm and could be held liable for the defaults of our customers, including losses incurred as the result of a customer’s failure to meet a margin call. When we allow customers to purchase securities on margin, we are subject to risks inherent in extending credit. This risk increases when a market is rapidly declining and the value of the collateral held falls below the amount of a customer’s indebtedness. If a customer’s account is liquidated as the result of a margin call, we are liable to our clearing firm for any deficiency. |
| ● | Competition in our investment banking, sales, and trading businesses could intensify as a result of the increasing pressures on financial services companies and larger firms competing for transactions and business that historically would have been too small for them to consider. |
| ● | Market volatility could result in lower prices for securities, which may result in reduced management fees calculated as a percentage of assets under management. |
| ● | Market declines could increase claims and litigation, including arbitration claims from customers. |
| ● | Our industry could face increased regulation as a result of legislative or regulatory initiatives. Compliance with such regulation may increase our costs and limit our ability to pursue business opportunities. |
| ● | Government intervention may not succeed in improving the financial and credit markets and may have negative consequences for our business. |
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It is difficult to predicthow long the current financial market and economic conditions related to the ongoing COVID-19 pandemic will continue, whether theywill further deteriorate and if they do, which of our business lines will be adversely affected. We are currently being impactedby the ongoing COVID-19 pandemic, including with respect to the above-described risks. While we are continuing to monitor the spreadof COVID-19 and related risks, the rapid development and fluidity of situation precludes any prediction as to its ultimate impacton us. However, if the spread continues, such impact could grow and our business, financial condition, results of operations andcash flows could be materially adversely affected.
Global economicand political uncertainty, in particular due to the ongoing COVID-19 pandemic, could adversely affect our revenue and results ofoperations.
As a result of the internationalnature of our business, we are subject to the risks arising from adverse changes in global economic and political conditions. Uncertaintyabout the effects of current and future economic and political conditions on us, our customers, suppliers and partners makes itdifficult for us to forecast operating results and to make decisions about future investments. Deterioration in economic conditionsin any of the countries in which we do business could result in reductions in sales of our products and services and could causeslower or impaired collections on accounts receivable, which may adversely impact our liquidity and financial condition.
The ongoing COVID-19pandemic has caused severe disruptions in the U.S. and global economy, which has impacted the business, activities, and operationsof our customers, as well as our business and operations. In March 2020, the Federal Reserve lowered the target range for the federalfunds rate to a range from 0 to 0.25 percent, citing concerns about the impact of COVID-19 on markets and stress in the energysector. Many states and localities have imposed limitations on commercial activity and public gatherings and events, as well asmoratoria on evictions. Concern about the spread of COVID-19 has caused and is likely to continue to cause quarantines, businessshutdowns, reduction in business activity and financial transactions, labor shortages, supply chain interruptions, increased unemploymentand overall economic and financial market instability, all of which may result a decrease in our business. Such conditions arelikely to exacerbate many of the risks described elsewhere in these Risk Factors. Unfavorable economic conditions may also makeit more difficult for us to access the capital markets, use the capital markets for our clients or otherwise obtain additionalfinancing.
The continued spreadof COVID-19, or a significant outbreak of another contagious disease, could negatively impact the availability of key personnelnecessary to conduct our business, and the business and operations of our third-party service providers who perform critical servicesfor our business. If COVID-19, or a future highly infectious or contagious disease, is not successfully contained, we could experiencea material adverse effect on our business, financial condition, results of operations and cash flow. Among the factors outsideour control that are likely to affect the impact the COVID-19 pandemic will ultimately have on our business are:
| ● | the pandemic’s course and severity; |
| ● | the direct and indirect results of the pandemic, such as recessionary economic trends, including with respect to employment, wages and benefits and commercial activity; |
| ● | political, legal and regulatory actions and policies in response to the pandemic, including the effects of restrictions on commerce or other public activities, moratoria and other suspensions of evictions or rent and related obligations; |
| ● | the timing, magnitude and effect of public spending, directly or through subsidies, its direct and indirect effects on commercial activity and incentives of employers and individuals to resume or increase employment, wages and benefits and commercial activity; |
| ● | the timing and availability of direct and indirect governmental support for various financial assets, and possible related distortions in market values and liquidity for such assets whose markets have or are assumed to have government support versus possibly similar assets that do not; |
| ● | potential longer-term effects of increased government spending on the interest rate environment and borrowing costs for non-governmental parties; |
| ● | the ability of our employees and our third-party vendors to work effectively during the course of the pandemic; |
| ● | potential longer-term shifts toward telecommuting and telecommerce; and |
| ● | geographic variation in the severity and duration of the COVID-19 pandemic, including in states such as New York and California where high percentages of our clients, customers and personnel are located. |
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We focus principallyon certain sectors of the economy in our investment banking operations, and deterioration in the business environment in thesesectors or a decline in the market for securities of companies within these sectors could harm our business.
Volatility in the businessenvironment in the industries in which our clients operate or in the market for securities of companies within these industriescould adversely affect our financial results and the market value of our common stock. The business environment for companies insome of these industries has been subject to high levels of volatility in recent years, and our financial results have consequentlybeen subject to significant variations from year to year. For example, the consumer goods and services sectors are subject to consumerspending trends, which have been volatile, to mall traffic trends, which have been down, to the availability of credit, and tobroader trends such as the rise of Internet retailers. Most recently, the consumer goods and services sector has been severelyimpacted by the ongoing COVID-19 pandemic, which has resulted in mandatory store closures of uncertain duration due to social distancingmeasures, stay-at-home work restrictions and the closing of non-essential businesses imposed to control the pandemic. Emergingmarkets have driven the growth of certain consumer companies but emerging market economies are fragile, subject to wide swingsin GDP, and subject to changes in foreign currencies. The technology industry has been volatile, driven by evolving technologytrends, by technological obsolescence, by enterprise spending, and by changes in the capital spending trends of major corporationsand government agencies around the world.
Our investment bankingoperations focus on various sectors of the economy, and we also depend significantly on private company transactions for sourcesof revenues and potential business opportunities. Most of these private company clients are initially funded and controlled byprivate equity firms. To the extent that the pace of these private company transactions slows or the average transaction size declinesdue to a decrease in private equity financings, difficult market conditions, such as those due to the ongoing COVID-19 pandemic,in our target industries or other factors, our business and results of operations may be harmed.
Underwriting and othercorporate finance transactions, strategic advisory engagements and related sales and trading activities in our target industriesrepresent a significant portion of our investment banking business. This concentration of activity in our target industries exposesus to the risk of declines in revenues in the event of downturns in these industries, such as those due to the ongoing COVID-19pandemic.
Our businessesmay be adversely affected by the disruptions in the credit markets, such as those due to the ongoing COVID-19 pandemic, includingreduced access to credit and liquidity and higher costs of obtaining credit.
In the event existinginternal and external financial resources do not satisfy our needs, we would have to seek additional outside financing. The availabilityof outside financing will depend on a variety of factors, such as our financial condition and results of operations, the availabilityof acceptable collateral, market conditions, the general availability of credit, the volume of trading activities, and the overallavailability of credit to the financial services industry, all of which may be negatively impacted due to the ongoing COVID-19pandemic.
Widening credit spreads,as well as significant declines in the availability of credit, could adversely affect our ability to borrow on an unsecured basis.Disruptions in the credit markets could make it more difficult and more expensive to obtain funding for our businesses. If ouravailable funding is limited or we are forced to fund our operations at a higher cost, these conditions may require us to curtailour business activities and increase our cost of funding, both of which could reduce our profitability, particularly in our businessesthat involve investing and taking principal positions.
Liquidity, or readyaccess to funds, is essential to financial services firms, including ours. Failures of financial institutions have often been attributablein large part to insufficient liquidity. Liquidity is of particular importance to our sales and trading business, and perceivedliquidity issues may affect the willingness of our clients and counterparties to engage in sales and trading transactions withus. Our liquidity could be impaired due to circumstances that we may be unable to control, such as a general market disruption,including disruptions due to the ongoing COVID-19 pandemic, or an operational problem that affects our sales and trading clients,third parties or us. Further, our ability to sell assets may be impaired if other market participants are seeking to sell similarassets at the same time.
Our clients engagingus with respect to mergers and acquisitions often rely on access to the secured and unsecured credit markets to finance their transactions.The lack of available credit and the increased cost of credit could adversely affect the size, volume and timing of our clients’merger and acquisition transactions-particularly large transactions-and adversely affect our investment banking business and revenues.
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Risks Related to Legal Liability,Risk Management, Finance and Accounting
Our exposure tolegal liability is significant, and could lead to substantial damages.
We face significantlegal risks in our businesses. These risks include potential liability under securities laws and regulations in connection withour Capital Markets, asset management and other businesses. The volume and amount of damages claimed in litigation, arbitrations,regulatory enforcement actions and other adversarial proceedings against financial services firms have increased in recent years.We also are subject to claims from disputes with our employees and our former employees under various circumstances. Risks associatedwith legal liability often are difficult to assess or quantify and their existence and magnitude can remain unknown for significantperiods of time, making the amount of legal reserves related to these legal liabilities difficult to determine and subject to futurerevision. Legal or regulatory matters involving our directors, officers or employees in their individual capacities also may createexposure for us because we may be obligated or may choose to indemnify the affected individuals against liabilities and expensesthey incur in connection with such matters to the extent permitted under applicable law. In addition, like other financial servicescompanies, we may face the possibility of employee fraud or misconduct. The precautions we take to prevent and detect this activitymay not be effective in all cases and there can be no assurance that we will be able to deter or prevent fraud or misconduct. Exposuresfrom and expenses incurred related to any of the foregoing actions or proceedings could have a negative impact on our results ofoperations and financial condition. In addition, future results of operations could be adversely affected if reserves relatingto these legal liabilities are required to be increased or legal proceedings are resolved in excess of established reserves.
We may incur lossesas a result of ineffective risk management processes and strategies.
We seek to monitor andcontrol our risk exposure through operational and compliance reporting systems, internal controls, management review processesand other mechanisms. Our investing and trading processes seek to balance our ability to profit from investment and trading positionswith our exposure to potential losses. While we employ limits and other risk mitigation techniques, those techniques and the judgmentsthat accompany their application cannot anticipate economic and financial outcomes or the specifics and timing of such outcomes.Thus, we may, in the course of our investment and trading activities, incur losses, which may be significant.
In addition, we areinvesting our own capital in our funds and funds of funds as well as principal investing activities, and limitations on our abilityto withdraw some or all of our investments in these funds or liquidate our investment positions, whether for legal, reputational,illiquidity or other reasons, may make it more difficult for us to control the risk exposures relating to these investments.
Our risk managementpolicies and procedures may leave us exposed to unidentified or unanticipated risks.
Our risk managementstrategies and techniques may not be fully effective in mitigating our risk exposure in all market environments or against alltypes of risk. We seek to manage, monitor and control our operational, legal and regulatory risk through operational and compliancereporting systems, internal controls, management review processes and other mechanisms; however, there can be no assurance thatour procedures will be fully effective. Further, our risk management methods may not effectively predict future risk exposures,which could be significantly greater than the historical measures indicate. In addition, some of our risk management methods arebased on an evaluation of information regarding markets, clients and other matters that are based on assumptions that may no longerbe accurate. A failure to adequately manage our growth, or to effectively manage our risk, could materially and adversely affectour business and financial condition.
We are exposed to therisk that third parties that owe us money, securities or other assets will not perform their obligations. These parties may defaulton their obligations to us due to bankruptcy, lack of liquidity, operational failure, and breach of contract or other reasons.We are also subject to the risk that our rights against third parties may not be enforceable in all circumstances. As an introducingbroker, we could be held responsible for the defaults or misconduct of our customers. These may present credit concerns, and defaultrisks may arise from events or circumstances that are difficult to detect, foresee or reasonably guard against. In addition, concernsabout, or a default by, one institution could lead to significant liquidity problems, losses or defaults by other institutions,which in turn could adversely affect us. If any of the variety of instruments, processes and strategies we utilize to manage ourexposure to various types of risk are not effective, we may incur losses.
Our failure todeal appropriately with conflicts of interest could damage our reputation and adversely affect our business.
As we have expandedthe number and scope of our businesses, we increasingly confront potential conflicts of interest relating to our and our funds’and clients’ investment and other activities. Certain of our funds have overlapping investment objectives, including fundswhich have different fee structures, and potential conflicts may arise with respect to our decisions regarding how to allocateinvestment opportunities among ourselves and those funds. For example, a decision to acquire material non-public information abouta company while pursuing an investment opportunity for a particular fund gives rise to a potential conflict of interest when itresults in our having to restrict the ability of the Company or other funds to take any action.
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In addition, there maybe conflicts of interest regarding investment decisions for funds in which our officers, directors and employees, who have madeand may continue to make significant personal investments in a variety of funds, are personally invested. Similarly, conflictsof interest may exist or develop regarding decisions about the allocation of specific investment opportunities between the Companyand the funds.
We also have potentialconflicts of interest with our investment banking and institutional clients including situations where our services to a particularclient or our own proprietary or fund investments or interests conflict or are perceived to conflict with a client. It is possiblethat potential or perceived conflicts could give rise to investor or client dissatisfaction or litigation or regulatory enforcementactions. Appropriately dealing with conflicts of interest is complex and difficult and our reputation could be damaged if we fail,or appear to fail, to deal appropriately with one or more potential or actual conflicts of interest. Regulatory scrutiny of, orlitigation in connection with, conflicts of interest would have a material adverse effect on our reputation, which would materiallyadversely affect our business in a number of ways, including as a result of redemptions by our investors from our hedge funds,an inability to raise additional funds and a reluctance of counterparties to do business with us.
Financial servicesfirms have been subject to increased scrutiny over the last several years, increasing the risk of financial liability and reputationalharm resulting from adverse regulatory actions.
Firms in the financialservices industry have been operating in a difficult regulatory environment which we expect will become even more stringent inlight of recent well-publicized failures of regulators to detect and prevent fraud. The industry has experienced increased scrutinyfrom a variety of regulators, including the SEC, the NYSE, FINRA and state attorneys general. Penalties and fines sought by regulatoryauthorities have increased substantially over the last several years. This regulatory and enforcement environment has created uncertaintywith respect to a number of transactions that had historically been entered into by financial services firms and that were generallybelieved to be permissible and appropriate. We may be adversely affected by changes in the interpretation or enforcement of existinglaws and rules by these governmental authorities and self-regulatory organizations. Each of the regulatory bodies with jurisdictionover us has regulatory powers dealing with many aspects of financial services, including, but not limited to, the authority tofine us and to grant, cancel, restrict or otherwise impose conditions on the right to carry on particular businesses. For example,a failure to comply with the obligations imposed by the Exchange Act on broker-dealers and the Investment Advisers Act of 1940on investment advisers, including record-keeping, advertising and operating requirements, disclosure obligations and prohibitionson fraudulent activities, or by the Investment Company Act of 1940, could result in investigations, sanctions and reputationaldamage. We also may be adversely affected as a result of new or revised legislation or regulations imposed by the SEC, other U.S.or foreign governmental regulatory authorities or FINRA or other self-regulatory organizations that supervise the financial markets.Substantial legal liability or significant regulatory action against us could have adverse financial effects on us or cause reputationalharm to us, which could harm our business prospects.
In addition, financialservices firms are subject to numerous conflicts of interests or perceived conflicts. The SEC and other federal and state regulatorshave increased their scrutiny of potential conflicts of interest. We have adopted various policies, controls and procedures toaddress or limit actual or perceived conflicts and regularly review and update our policies, controls and procedures. However,appropriately addressing conflicts of interest is complex and difficult and our reputation could be damaged if we fail, or appearto fail, to appropriately address conflicts of interest. Our policies and procedures to address or limit actual or perceived conflictsmay also result in increased costs and additional operational personnel. Failure to adhere to these policies and procedures mayresult in regulatory sanctions or litigation against us. For example, the research operations of investment banks have been andremain the subject of heightened regulatory scrutiny which has led to increased restrictions on the interaction between equityresearch analysts and investment banking professionals at securities firms. Several securities firms in the U.S. reached a globalsettlement in 2003 and 2004 with certain federal and state securities regulators and self-regulatory organizations to resolve investigationsinto the alleged conflicts of interest of research analysts, which resulted in rules that have imposed additional costs and limitationson the conduct of our business.
Asset management businesseshave experienced a number of highly publicized regulatory inquiries which have resulted in increased scrutiny within the industryand new rules and regulations for mutual funds, investment advisors and broker-dealers. Our subsidiary, B. Riley Capital Management,LLC, is registered as an investment advisor with the SEC and regulatory scrutiny and rulemaking initiatives may result in an increasein operational and compliance costs or the assessment of significant fines or penalties against our asset management business,and may otherwise limit our ability to engage in certain activities. In addition, the SEC staff has conducted studies with respectto soft dollar practices in the brokerage and asset management industries and proposed interpretive guidance regarding the scopeof permitted brokerage and research services in connection with soft dollar practices. The SEC staff has indicated that it is consideringadditional rulemaking in this and other areas, and we cannot predict the effect that additional rulemaking may have on our assetmanagement or brokerage business or whether it will be adverse to us. In addition, Congress is currently considering imposing newrequirements on entities that securitize assets, which could affect our credit activities. It is impossible to determine the extentof the impact of any new laws, regulations or initiatives that may be proposed, or whether any of the proposals will become law.Compliance with any new laws or regulations could make compliance more difficult and expensive and affect the manner in which weconduct business.
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Financial reformsand related regulations may negatively affect our business activities, financial position and profitability.
The Dodd-Frank WallStreet Reform and Consumer Protection Act (the “Dodd-Frank Act”) instituted a wide range of reforms that have impactedand will continue to impact financial services firms and continues to require significant rule-making. In addition, the legislationmandates multiple studies, which could result in additional legislative or regulatory action. The legislation and regulation offinancial institutions, both domestically and internationally, include calls to increase capital and liquidity requirements; limitthe size and types of the activities permitted; and increase taxes on some institutions. FINRA’s oversight over broker-dealersand investment advisors may be expanded, and new regulations on having investment banking and securities analyst functions in thesame firm may be created. Certain of the provisions of the Dodd-Frank Act remain subject to further rule making procedures andstudies. As a result, we cannot assess the full impact of all of these legislative and regulatory changes on our business at thepresent time. However, these legislative and regulatory changes could affect our revenue, limit our ability to pursue businessopportunities, impact the value of assets that we hold, require us to change certain of our business practices, impose additionalcosts on us, or otherwise adversely affect our businesses. If we do not comply with current or future legislation and regulationsthat apply to our operations, we may be subject to fines, penalties or material restrictions on our businesses in the jurisdictionwhere the violation occurred. Accordingly, such legislation or regulation could have an adverse effect on our business, resultsof operations, cash flows or financial condition.
If we cannot meetour future capital requirements, we may be unable to develop and enhance our services, take advantage of business opportunitiesand respond to competitive pressures.
We may need to raiseadditional funds in the future to grow our business internally, invest in new businesses, expand through acquisitions, enhanceour current services or respond to changes in our target markets. If we raise additional capital through the sale of equity orequity derivative securities, the issuance of these securities could result in dilution to our existing stockholders. If additionalfunds are raised through the issuance of debt securities, the terms of that debt could impose additional restrictions on our operationsor harm our financial condition. Additional financing may be unavailable on acceptable terms.
Our ability to use net loss carryoversto reduce our taxable income may be limited.
As a result of the commonstock offering that was completed on June 5, 2014, the Company had a more than 50% ownership shift in accordance with Section 382of the Internal Revenue Code of 1986, as amended (the “Code”). Accordingly, the Company may be limited to the amountof net operating loss that may be utilized in future taxable years depending on the Company’s actual taxable income. As aresult of the acquisition of UOL on July 1, 2016, the historical net operating losses of UOL are limited to offset income we generatepost acquisition. As of December 31, 2019, the Company believes that the net operating loss that existed as of the more than 50%ownership shift will be utilized in future tax periods before the loss carryforwards expire and it is more-likely-than-not thatfuture taxable earnings will be sufficient to realize its deferred tax assets and has not provided an allowance. However, to theextent that the Company is unable to utilize such net operating loss, it may have a material adverse effect on our financial conditionand results of operations.
The tax benefits,grants and other incentives available to us require us to continue to meet various conditions and may be terminated, repaid orreduced in the future, which could increase our costs and taxes.
The Israeli governmentcurrently provides major tax and capital investment incentives to domestic companies, as well as grant and loan programs relatingto research and development and marketing and export activities. In recent years, the Israeli Government has reduced the benefitsavailable under these programs and the Israeli Governmental authorities have indicated that the government may in the future furtherreduce, seek repayment or eliminate the benefits of those programs. magicJack currently takes advantage of these programs. Thereis no assurance that we will continue to meet the conditions of such benefits and programs or that such benefits and programs wouldcontinue to be available to us in the future. If we fail to meet the conditions of such benefits and programs or if they are terminatedor further reduced, it could have an adverse effect on our business, operating results and financial condition.
Changes in taxlaws or regulations, or to interpretations of existing tax laws or regulations, to which we are subject could adversely affectour financial condition and cash flows.
We are subject to taxationin the United States and in some foreign jurisdictions. Our financial condition and cash flows are impacted by tax policy implementedat each of the federal, state, local and international levels. We cannot predict whether any changes to tax laws or regulations,or to interpretations of existing tax laws or regulations, will be implemented in the future or whether any such changes wouldhave a material adverse effect on our financial condition and cash flows. However, future changes to tax laws or regulations, orto interpretations of existing tax laws or regulations, could increase our tax burden or otherwise adversely affect our financialcondition and cash flows.
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Our failure tomaintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act could havea material adverse effect on our financial condition, results of operations and business and the price of our common stock andother securities.
The Sarbanes-Oxley Actand the related rules require our management to conduct an annual assessment of the effectiveness of our internal control overfinancial reporting and require a report by our independent registered public accounting firm addressing our internal control overfinancial reporting. To comply with Section 404 of the Sarbanes-Oxley Act, we are required to document formal policies, processesand practices related to financial reporting that are necessary to comply with Section 404. Such policies, processes and practicesare important to ensure the identification of key financial reporting risks, assessment of their potential impact and linkage ofthose risks to specific areas and activities within our organization.
If we fail for any reasonto comply with the requirements of Section 404 in a timely manner, our independent registered public accounting firm may, at thattime, issue an adverse report regarding the effectiveness of our internal control over financial reporting. Matters impacting ourinternal controls may cause us to be unable to report our financial information on a timely basis and thereby subject us to adverseregulatory consequences, including sanctions by the SEC or violations of applicable stock exchange listing rules. There could alsobe a negative reaction in the financial markets due to a loss of investor confidence in us and the reliability of our financialstatements. Any such event could adversely affect our financial condition, results of operations and business, and result in adecline in the price of our common stock and other securities.
We may suffer losses if our reputationis harmed.
Our ability to attractand retain customers and employees may be diminished to the extent our reputation is damaged. If we fail, or are perceived to fail,to address various issues that may give rise to reputational risk, we could harm our business prospects. These issues include,but are not limited to, appropriately dealing with market dynamics, potential conflicts of interest, legal and regulatory requirements,ethical issues, customer privacy, record-keeping, sales and trading practices, and the proper identification of the legal, reputational,credit, liquidity and market risks inherent in our products and services. Failure to appropriately address these issues could giverise to loss of existing or future business, financial loss, and legal or regulatory liability, including complaints, claims andenforcement proceedings against us, which could, in turn, subject us to fines, judgments and other penalties. In addition, ourCapital Markets operations depend to a large extent on our relationships with our clients and reputation for integrity and high-caliberprofessional services to attract and retain clients. As a result, if a client is not satisfied with our services, it may be moredamaging in our business than in other businesses.
Misconduct byour employees or by the employees of our business partners could harm us and is difficult to detect and prevent.
There have been a numberof highly publicized cases involving fraud or other misconduct by employees in the financial services industry in recent years,and we run the risk that employee misconduct could occur at our firm. For example, misconduct could involve the improper use ordisclosure of confidential information, which could result in regulatory sanctions and serious reputational or financial harm.It is not always possible to deter misconduct and the precautions we take to detect and prevent this activity may not be effectivein all cases. Our ability to detect and prevent misconduct by entities with which we do business may be even more limited. We maysuffer reputational harm for any misconduct by our employees or those entities with which we do business.
We may enter intonew lines of business, make strategic investments or acquisitions or enter into joint ventures, each of which may result in additionalrisks and uncertainties for our business.
We may enter into newlines of business, make future strategic investments or acquisitions and enter into joint ventures. As we have in the past, andsubject to market conditions, we may grow our business by increasing assets under management in existing investment strategies,pursue new investment strategies, which may be similar or complementary to our existing strategies or be wholly new initiatives,or enter into strategic relationships, or joint ventures. In addition, opportunities may arise to acquire or invest in other businessesthat are related or unrelated to our current businesses.
To the extent we makestrategic investments or acquisitions, enter into strategic relationships or joint ventures or enter into new lines of business,we will face numerous risks and uncertainties, including risks associated with the required investment of capital and other resourcesand with combining or integrating operational and management systems and controls and managing potential conflicts. Entry intocertain lines of business may subject us to new laws and regulations with which we are not familiar, or from which we are currentlyexempt, and may lead to increased litigation and regulatory risk. If a new business generates insufficient revenues, or producesinvestment losses, or if we are unable to efficiently manage our expanded operations, our results of operations will be adverselyaffected, and our reputation and business may be harmed. In the case of joint ventures, we are subject to additional risks anduncertainties in that we may be dependent upon, and subject to liability, losses or reputational damage relating to, systems, controlsand personnel that are not under our control.
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Risks Related to Our Capital MarketsActivities
Our corporatefinance and strategic advisory engagements are singular in nature and do not generally provide for subsequent engagements.
Our investment bankingclients generally retain us on a short-term, engagement-by-engagement basis in connection with specific corporate finance, mergerand acquisition transactions (often as an advisor in company sale transactions) and other strategic advisory services, rather thanon a recurring basis under long-term contracts. As these transactions are typically singular in nature and our engagements withthese clients may not recur, we must seek new engagements when our current engagements are successfully completed or are terminated.As a result, high activity levels in any period are not necessarily indicative of continued high levels of activity in any subsequentperiod. If we are unable to generate a substantial number of new engagements that generate fees from new or existing clients, ourbusiness, results of operations and financial condition could be adversely affected.
Our Capital Marketsoperations are highly dependent on communications, information and other systems and third parties, and any systems failures couldsignificantly disrupt our Capital Markets business.
Our data and transactionprocessing, custody, financial, accounting and other technology and operating systems are essential to our Capital Markets operations.A system malfunction (due to hardware failure, capacity overload, security incident, data corruption, etc.) or mistake made relatingto the processing of transactions could result in financial loss, liability to clients, regulatory intervention, reputational damageand constraints on our ability to grow. We outsource a substantial portion of our critical data processing activities, includingtrade processing and back office data processing. We also contract with third parties for market data and other services. In theevent that any of these service providers fails to adequately perform such services or the relationship between that service providerand us is terminated, we may experience a significant disruption in our operations, including our ability to timely and accuratelyprocess transactions or maintain complete and accurate records of those transactions.
Adapting or developingour technology systems to meet new regulatory requirements, client needs, expansion and industry demands also is critical for ourbusiness. Introduction of new technologies present new challenges on a regular basis. We have an ongoing need to upgrade and improveour various technology systems, including our data and transaction processing, financial, accounting, risk management and tradingsystems. This need could present operational issues or require significant capital spending. It also may require us to make additionalinvestments in technology systems and may require us to reevaluate the current value and/or expected useful lives of our technologysystems, which could negatively impact our results of operations.
Secure processing, storageand transmission of confidential and other information in our internal and outsourced computer systems and networks also is criticallyimportant to our business. We take protective measures and endeavor to modify them as circumstances warrant. However, our computersystems and software are subject to unauthorized access, computer viruses or other malicious code, inadvertent, erroneous or interceptedtransmission of information (including by e-mail), and other events that have had an information security impact. If one or moreof such events occur, this potentially could jeopardize our or our clients’ or counterparties’ confidential and otherinformation processed and stored in, and transmitted through, our computer systems and networks, or otherwise cause interruptionsor malfunctions in our, our clients’, our counterparties’ or third parties’ operations. We may be required toexpend significant additional resources to modify our protective measures or to investigate and remediate vulnerabilities or otherexposures, and we may be subject to litigation and financial losses that are either not insured against or not fully covered throughany insurance maintained by us.
A disruption in theinfrastructure that supports our business due to fire, natural disaster, health emergency (for example, the ongoing COVID-19 pandemic),power or communication failure, act of terrorism or war may affect our ability to service and interact with our clients. If weare not able to implement contingency plans effectively, any such disruption could harm our results of operations. Due to the ongoingCOVID-19 pandemic, many businesses, including ours, have shifted largely to telecommuting. While we continue to evaluate the situationand invest in our technological infrastructure, the duration and effects of this shift are uncertain, but could make our operationsmore vulnerable.
The growth ofelectronic trading and the introduction of new technology in the markets in which our market-making business operates may adverselyaffect this business and may increase competition.
The continued growthof electronic trading and the introduction of new technologies is changing our market-making business and presenting new challenges.Securities, futures and options transactions are increasingly occurring electronically, through alternative trading systems. Weexpect that the trend toward alternative trading systems will continue to accelerate. This acceleration could further increaseprogram trading, increase the speed of transactions and decrease our ability to participate in transactions as principal, whichwould reduce the profitability of our market-making business. Some of these alternative trading systems compete with our market-makingbusiness and with our algorithmic trading platform, and we may experience continued competitive pressures in these and other areas.Significant resources have been invested in the development of our electronic trading systems, which includes our at-the-marketbusiness, but there is no assurance that the revenues generated by these systems will yield an adequate return on the investment,particularly given the increased program trading and increased percentage of stocks trading off of the historically manual tradingmarkets.
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Pricing and other competitive pressuresmay impair the revenues of our sales and trading business.
We derive a significantportion of our revenues for our investment banking operations from our sales and trading business. There has been intense pricecompetition and trading volume reduction in this business in recent years. In particular, the ability to execute trades electronicallyand through alternative trading systems has increased the downward pressure on per share trading commissions and spreads. We expectthese trends toward alternative trading systems and downward pricing pressure in the business to continue. We experience competitivepressures in these and other areas in the future as some of our competitors seek to obtain market share by competing on the basisof price or by using their own capital to facilitate client trading activities. In addition, we face pressure from our larger competitors,many of whom are better able to offer a broader range of complementary products and services to clients in order to win their tradingbusiness. These larger competitors may also be better able to respond to changes in the research, brokerage and investment bankingindustries, to compete for skilled professionals, to finance acquisitions, to fund internal growth and to compete for market sharegenerally. As we are committed to maintaining and improving our comprehensive research coverage in our target sectors to supportour sales and trading business, we may be required to make substantial investments in our research capabilities to remain competitive.If we are unable to compete effectively in these areas, the revenues of our sales and trading business may decline, and our business,results of operations and financial condition may be harmed.
Some of our large institutionalsales and trading clients in terms of brokerage revenues have entered into arrangements with us and other investment banking firmsunder which they separate payments for research products or services from trading commissions for sales and trading services, andpay for research directly in cash, instead of compensating the research providers through trading commissions (referred to as “softdollar” practices). In addition, we have entered into certain commission sharing arrangements in which institutional clientsexecute trades with a limited number of brokers and instruct those brokers to allocate a portion of the commission directly tous or other broker-dealers for research or to an independent research provider. If more of such arrangements are reached betweenour clients and us, or if similar practices are adopted by more firms in the investment banking industry, we expect that wouldincrease the competitive pressures on trading commissions and spreads and reduce the value our clients place on high quality research.Conversely, if we are unable to make similar arrangements with other investment managers that insist on separating trading commissionsfrom research products, volumes and trading commissions in our sales and trading business also would likely decrease.
Larger and morefrequent capital commitments in our trading and underwriting businesses increase the potential for significant losses.
Certain financial servicesfirms make larger and more frequent commitments of capital in many of their activities. For example, in order to win business,some investment banks increasingly commit to purchase large blocks of stock from publicly traded issuers or significant stockholders,instead of the more traditional marketed underwriting process in which marketing is typically completed before an investment bankcommits to purchase securities for resale. We have participated in this activity and expect to continue to do so and, as a result,we are subject to increased risk. Conversely, if we do not have sufficient regulatory capital to so participate, our business maysuffer. Furthermore, we may suffer losses as a result of the positions taken in these transactions even when economic and marketconditions are generally favorable for others in the industry.
We may increasinglycommit our own capital as part of our trading business to facilitate client sales and trading activities. The number and size ofthese transactions may adversely affect our results of operations in a given period. We may also incur significant losses fromour sales and trading activities due to market fluctuations and volatility in our results of operations. To the extent that weown assets, i.e., have long positions, in any of those markets, a downturn in the value of those assets or in those markets couldresult in losses. Conversely, to the extent that we have sold assets we do not own, i.e., have short positions, in any of thosemarkets, an upturn in those markets could expose us to potentially large losses as we attempt to cover our short positions by acquiringassets in a rising market.
Our underwritingand market making activities may place our capital at risk.
We may incur lossesand be subject to reputational harm to the extent that, for any reason, we are unable to sell securities we purchased as an underwriterat the anticipated price levels. As an underwriter, we also are subject to heightened standards regarding liability for materialmisstatements or omissions in prospectuses and other offering documents relating to offerings we underwrite. Further, even thoughunderwriting agreements with issuing companies typically include a right to indemnification in favor of the underwriter for theseofferings to cover potential liability from any material misstatements or omissions, indemnification may be unavailable or insufficientin certain circumstances, for example if the issuing company has become insolvent. As a market maker, we may own large positionsin specific securities, and these undiversified holdings concentrate the risk of market fluctuations and may result in greaterlosses than would be the case if our holdings were more diversified.
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We are subjectto net capital and other regulatory capital requirements; failure to comply with these rules would significantly harm our business.
Our broker-dealer subsidiaries, are subject to the net capital requirements of the SEC, FINRA, and various self-regulatory organizationsof which they are members. These requirements typically specify the minimum level of net capital a broker-dealer must maintain andalso mandate that a significant part of its assets be kept in relatively liquid form. Failure to maintain the required net capitalmay subject a firm to limitation of its activities, including suspension or revocation of its registration by the SEC and suspensionor expulsion by FINRA and other regulatory bodies, and ultimately may require its liquidation. Failure to comply with the net capitalrules could have material and adverse consequences, such as:
| ● | limiting our operations that require intensive use of capital, such as underwriting or trading activities; or |
| ● | restricting us from withdrawing capital from our subsidiaries, when our broker-dealer subsidiaries have more than the minimum amount of required capital. This, in turn, could limit our ability to implement our business and growth strategies, pay interest on and repay the principal of our debt and/or repurchase our shares. |
In addition, a changein the net capital rules or the imposition of new rules affecting the scope, coverage, calculation, or amount of net capital requirements,or a significant operating loss or any large charge against net capital, could have similar adverse effects.
Furthermore, our broker-dealer subsidiaries are subject to laws that authorize regulatory bodies to block or reduce the flow of funds from it to B. Riley Financial,Inc. As a holding company, B. Riley Financial, Inc. depends on dividends, distributions and other payments from its subsidiariesto fund dividend payments, if any, and to fund all payments on its obligations, including debt obligations. As a result, regulatoryactions could impede access to funds that B. Riley Financial, Inc. needs to make payments on obligations, including debt obligations,or dividend payments. In addition, because B. Riley Financial, Inc. holds equity interests in the firm’s subsidiaries, itsrights as an equity holder to the assets of these subsidiaries may not materialize, if at all, until the claims of the creditorsof these subsidiaries are first satisfied.
Risks Related to our Principal InvestmentsActivities
We have made andmay make Principal Investments in relatively high-risk, illiquid assets that often have significantly leveraged capital structures,and we may fail to realize any profits from these activities for a considerable period of time or lose some or all of the principalamount we invest in these activities.
From time to time, weuse our capital, including on a leveraged basis, in proprietary investments in both private company and public company securitiesthat may be illiquid and volatile. The equity securities of a privately-held entity in which we make a proprietary investment arelikely to be restricted as to resale and are otherwise typically highly illiquid. In the case of fund or similar investments, ourinvestments may be illiquid until such investment vehicles are liquidated. We expect that there will be restrictions on our abilityto resell the securities that we acquire for a period of up to one year after we acquire those securities. Thereafter, a publicmarket sale may be subject to volume limitations or dependent upon securing a registration statement for an initial and potentiallysecondary public offering of the securities. We may make Principal Investments that are significant relative to the overall capitalizationof the investee company and resales of significant amounts of these securities might be subject to significant limitations andadversely affect the market and the sales price for the securities in which we invest. In addition, our Principal Investments mayinvolve entities or businesses with capital structures that have significant leverage. The large amount of borrowing in the leveragedcapital structure increases the risk of losses due to factors such as rising interest rates, downturns in the economy or deteriorationsin the condition of the investment or its industry. In the event of defaults under borrowings, the assets being financed wouldbe at risk of foreclosure, and we could lose our entire investment.
Even if we make an appropriateinvestment decision based on the intrinsic value of an enterprise, we cannot assure you that general market conditions will notcause the market value of our investments to decline. For example, an increase in interest rates, a general decline in the stockmarkets, such as the recent declines in the stock markets due to the ongoing COVID-19 pandemic, or other market and industry conditionsadverse to companies of the type in which we invest and intend to invest could result in a decline in the value of our investmentsor a total loss of our investment.
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In addition, some ofthese investments are, or may in the future be, in industries or sectors which are unstable, in distress or undergoing some uncertainty.Further, the companies in which we invest may rely on new or developing technologies or novel business models, or concentrate onmarkets which are or may be disproportionately impacted by pressures in the financial services and/or mortgage and real estatesectors, have not yet developed and which may never develop sufficiently to support successful operations, or their existing businessoperations may deteriorate or may not expand or perform as projected. Such investments may be subject to rapid changes in valuecaused by sudden company-specific or industry-wide developments. Contributing capital to these investments is risky, and we maylose some or all of the principal amount of our investments. There are no regularly quoted market prices for a number of the investmentsthat we make. The value of our investments is determined using fair value methodologies described in valuation policies, whichmay consider, among other things, the nature of the investment, the expected cash flows from the investment, bid or ask pricesprovided by third parties for the investment and the trading price of recent sales of securities (in the case of publicly-tradedsecurities), restrictions on transfer and other recognized valuation methodologies. The methodologies we use in valuing individualinvestments are based on estimates and assumptions specific to the particular investments. Therefore, the value of our investmentsdoes not necessarily reflect the prices that would actually be obtained by us when such investments are sold. Realizations, ifany, at values significantly lower than the values at which investments have been reflected on our balance sheet would result inloses of potential incentive income and Principal Investments.
Weare exposed to credit risk from a variety of our activities, including loans, lines of credit, guarantees and backstop commitments,and we may not be able to fully realize the value of the collateral securing certain of our loans.
We are generally exposedto the risk that third parties that owe us money, securities or other assets will fail to meet their obligations to us due to numerouscauses, including bankruptcy, lack of liquidity, or operational failure, among others. Additionally, when we guarantee or backstopthe obligations of third parties, we are exposed to the risk that our guarantee or backstop may be called by the holder followinga default by the primary obligor, which could cause us to incur significant losses, and, when our obligations are secured, exposeus to the risk that the holder may seek to foreclose on collateral pledged by us.
We incur credit riskthrough loans, lines of credit, guarantees and backstop commitments issued to or on behalf of businesses and individuals, and otherloans collateralized by a variety of assets, including securities. Our credit risk and credit losses can increase if our loansor investments are concentrated among borrowers or issuers engaged in the same or similar activities, industries, or geographies,or to borrowers or issuers who as a group may be uniquely or disproportionately affected by economic or market conditions. Thedeterioration of an individually large exposure, for example due to natural disasters, health emergencies or pandemics (like theongoing COVID-19 pandemic), acts of terrorism, severe weather events or other adverse economic events, could lead to additionalloan loss provisions and/or charges-offs, or credit impairment of our investments, and subsequently have a material impact on ournet income and regulatory capital.
Theamount and duration of our credit exposures have been increasing over the past year, as have the breadth and size of the entitiesto which we have credit exposures.
We permit our clientsto purchase securities on margin. During periods of steep declines in securities prices, the value of the collateral securing clientmargin loans may fall below the amount of the purchaser’s indebtedness. If clients are unable to provide additional collateralfor these margin loans, we may incur losses on those margin transactions. This may cause us to incur additional expenses defendingor pursuing claims or litigation related to counterparty or client defaults.
Although a substantialamount of our loans to counterparties are protected by holding security interests in the assets or equity interests of the borrower,we may not be able to fully realize the value of the collateral securing our loans due to one or more of the following factors:
| ● | Our loans may be unsecured, therefore our liens on the collateral, if any, are subordinated to those of the senior secured debt of the borrower, if any. As a result, we may not be able to control remedies with respect to the collateral. |
| ● | The collateral may not be valuable enough to satisfy all of the obligations under our secured loan, particularly after giving effect to the repayment of secured debt of the borrower that ranks senior to our loan. |
| ● | Bankruptcy laws may limit our ability to realize value from the collateral and may delay the realization process. |
| ● | Our rights in the collateral may be adversely affected by the failure to perfect security interests in the collateral. |
| ● | The need to obtain regulatory and contractual consents could impair or impede how effectively the collateral would be liquidated and could affect the value received. |
| ● | Some or all of the collateral may be illiquid and may have no readily ascertainable market value. The liquidity and value of the collateral could be impaired as a result of changing economic conditions, competition, and other factors, including the availability of suitable buyers. |
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We may experiencewrite downs of our investments and other losses related to the valuation of our investments and volatile and illiquid market conditions.
In our proprietary investmentactivities, our concentrated holdings, illiquidity and market volatility may make it difficult to value certain of our investmentsecurities. Subsequent valuations, in light of factors then prevailing, may result in significant changes in the values of thesesecurities in future periods. In addition, at the time of any sales and settlements of these securities, the price we ultimatelyrealize will depend on the demand and liquidity in the market at that time and may be materially lower than their current fairvalue. Any of these factors could require us to take write downs in the value of our investment and securities portfolio, whichmay have an adverse effect on our results of operations in future periods.
Risks Related to our Auction andLiquidation Activities
We may incur lossesas a result of “guarantee” based engagements that we enter into in connection with our Auction and Liquidation solutionsbusiness.
In many instances, inorder to secure an engagement, we are required to bid for that engagement by guaranteeing to the client a minimum amount that suchclient will receive from the sale of inventory or assets. Our bid is based on a variety of factors, including: our experience,expertise, perceived value added by engagement, valuation of the inventory or assets and the prices we believe potential buyerswould be willing to pay for such inventory or assets. An inaccurate estimate of any of the above or inaccurate valuation of theassets or inventory could result in us submitting a bid that exceeds the realizable proceeds from any engagement. If the liquidationproceeds, net of direct operating expenses, are less than the amount we guaranteed in our bid, we will incur a loss. Therefore,in the event that the proceeds, net of direct operating expenses, from an engagement are less than the bid, the value of the assetsor inventory decline in value prior to the disposition or liquidation, or the assets are overvalued for any reason, we may suffera loss and our financial condition and results of operations could be adversely affected.
Losses due toany auction or liquidation engagement may cause us to become unable to make payments due to our creditors and may cause us to defaulton our debt obligations.
We have three engagementstructures for our Auction and Liquidation services: (i) a “fee” based structure under which we are compensated forour role in an engagement on a commission basis, (ii) purchase on an outright basis (and take title to) the assets or inventoryof the client, and (iii) “guarantee” to the client that a certain amount will be realized by the client upon the saleof the assets or inventory based on contractually defined terms in the auction or liquidation contract. We bear the risk of lossunder the purchase and guarantee structures of Auction and Liquidation contracts. If the amount realized from the sale or dispositionof assets, net of direct operating expenses, does not equal or exceed the purchase price (in purchase transaction), we will recognizea loss on the engagement, or should the amount realized, net of direct operating expenses, not equal or exceed the “guarantee,”we are still required to pay the guaranteed amount to the client.
The ongoing COVID-19pandemic has temporarily limited our Auction and Liquidation businesses.
While we expect that our Auction and Liquidationservices business will experience increased demand in the medium to long term as a result of business disruptions due to the ongoingCOVID-19 pandemic, restrictions limiting travel, public gatherings and requiring store closures due to socialdistancing measures imposed to control the pandemic has temporarily limited our ability to conduct auctions and liquidations. Wecannot predict when these restrictions will be relaxed or lifted or the extent to which such restrictions will materially and negativelyaffect our auction and liquidation businesses.
We could incurlosses in connection with outright purchase transactions in which we engage as part of our Auction and Liquidation solutions business.
When we conduct an assetdisposition or liquidation on an outright purchase basis, we purchase from the client the assets or inventory to be sold or liquidatedand therefore, we hold title to any assets or inventory that we are not able to sell. In other situations, we may acquire assetsfrom our clients if we believe that we can identify a potential buyer and sell the assets at a premium to the price paid. We storethese unsold or acquired assets and inventory until they can be sold or, alternatively, transported to the site of a liquidationof comparable assets or inventory that we are conducting. If we are forced to sell these assets for less than we paid, or are requiredto transport and store assets multiple times, the related expenses could have a material adverse effect on our results of operations.
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We could be forcedto mark down the value of certain assets acquired in connection with outright purchase transactions.
In most instances, inventoryis reported on the balance sheet at its historical cost; however, according to U.S. Generally Accepted Accounting Principles, inventorywhose historical cost exceeds its market value should be valued conservatively, which dictates a lower value should apply. Accordingly,should the replacement cost (due to technological obsolescence or otherwise), or the net realizable value of any inventory we holdbe less than the cost paid to acquire such inventory (purchase price), we will be required to “mark down” the valueof such inventory held. If the value of any inventory held on our balance sheet is required to be written down, such write downcould have a material adverse effect on our financial position and results of operations.
We frequentlyuse borrowings under credit facilities in connection with our guaranty engagements, in which we guarantee a minimum recovery tothe client, and outright purchase transactions.
In engagements wherewe operate on a guaranty or purchase basis, we are typically required to make an upfront payment to the client. If the upfrontpayment is less than 100% of the guarantee or the purchase price in a “purchase” transaction, we may be required tomake successive cash payments until the guarantee is met or we may issue a letter of credit in favor of the client. Depending onthe size and structure of the engagement, we may borrow under our credit facilities and may be required to issue a letter of creditin favor of the client for these additional amounts. If we lose any availability under our credit facilities, are unable to borrowunder credit facilities and/or issue letters of credit in favor of clients, or borrow under credit facilities and/or issue lettersof credit on commercially reasonable terms, we may be unable to pursue large liquidation and disposition engagements, engage inmultiple concurrent engagements, pursue new engagements or expand our operations. We are required to obtain approval from the lendersunder our existing credit facilities prior to making any borrowings thereunder in connection with a particular engagement. Anyinability to borrow under our credit facilities, or enter into one or more other credit facilities on commercially reasonable termsmay have a material adverse effect on our financial condition, results of operations and growth.
Defaults underour credit agreements could have an adverse impact on our ability to finance potential engagements.
The terms of our creditagreements contain a number of events of default. Should we default under any of our credit agreements in the future, lenders maytake any or all remedial actions set forth in such credit agreement, including, but not limited to, accelerating payment and/orcharging us a default rate of interest on all outstanding amounts, refusing to make any further advances or issue letters of credit,or terminating the line of credit. As a result of our reliance on lines of credit and letters of credit, any default under a creditagreement, or remedial actions pursued by lenders following any default under a credit agreement, may require us to immediatelyrepay all outstanding amounts, which may preclude us from pursuing new liquidation and disposition engagements and may increaseour cost of capital, each of which may have a material adverse effect on our financial condition and results of operations.
Risks Related to Our Financial ConsultingActivities
We depend on financialinstitutions as primary clients for our Financial Consulting business. Consequently, the loss of any financial institutions asclients may have an adverse impact on our business.
A majority of the revenuefrom our Financial Consulting business is derived from engagements by financial institutions. As a result, any loss of financialinstitutions as clients of our valuation and advisory services, whether due to changing preferences in service providers, failuresof financial institutions or mergers and consolidations within the finance industry, could significantly reduce the number of existing,repeat and potential clients, thereby adversely affecting our revenues. In addition, any larger financial institutions that resultfrom mergers or consolidations in the financial services industry could have greater leverage in negotiating terms of engagementswith us, or could decide to internally perform some or all of the Financial Consulting services which we currently provide to oneof the constituent institutions involved in the merger or consolidation or which we could provide in the future. Any of these developmentscould have a material adverse effect on our Financial Consulting business.
We may face liabilityor harm to our reputation as a result of a claim that we provided an inaccurate appraisal or valuation and our insurance coveragemay not be sufficient to cover the liability.
We could face liabilityin connection with a claim by a client that we provided an inaccurate appraisal or valuation on which the client relied. Any claimof this type, whether with or without merit, could result in costly litigation, which could divert management’s attentionand company resources and harm our reputation. Furthermore, if we are found to be liable, we may be required to pay damages. Whileour appraisals and valuations are typically provided only for the benefit of our clients, if a third party relies on an appraisalor valuation and suffers harm as a result, we may become subject to a legal claim, even if the claim is without merit. We carryinsurance for liability resulting from errors or omissions in connection with our appraisals and valuations; however, the coveragemay not be sufficient if we are found to be liable in connection with a claim by a client or third party.
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Risks Related to our Asset Management Business
The asset management business is intenselycompetitive.
Over the past severalyears, the size and number of asset management funds, including hedge funds and mutual funds, has continued to increase. If thistrend continues, it is possible that it will become increasingly difficult for our funds to raise capital. More significantly,the allocation of increasing amounts of capital to alternative investment strategies by institutional and individual investorsleads to a reduction in the size and duration of pricing inefficiencies. Many alternative investment strategies seek to exploitthese inefficiencies and, in certain industries, this drives prices for investments higher, in either case increasing the difficultyof achieving targeted returns. In addition, if interest rates were to rise or there were to be a prolonged bull market in equities,the attractiveness of our funds relative to investments in other investment products could decrease. Competition is based on avariety of factors, including:
| ● | investment performance; |
| ● | investor perception of the drive, focus and alignment of interest of an investment manager; |
| ● | quality of service provided to and duration of relationship with investors; |
| ● | business reputation; and |
| ● | level of fees and expenses charged for services. |
We compete in the assetmanagement business with a large number of investment management firms, private equity fund sponsors, hedge fund sponsors and otherfinancial institutions. A number of factors serve to increase our competitive risks, as follows:
| ● | investors may develop concerns that we will allow a fund to grow to the detriment of its performance; |
| ● | some of our competitors have greater capital, lower targeted returns or greater sector or investment strategy specific expertise than we do, which creates competitive disadvantages with respect to investment opportunities; |
| ● | some of our competitors may perceive risk differently than we do which could allow them either to outbid us for investments in particular sectors or, generally, to consider a wider variety of investments; |
| ● | there are relatively few barriers to entry impeding new asset management firms, and the successful efforts of new entrants into our various lines of business, including former “star” portfolio managers at large diversified financial institutions as well as such institutions themselves, will continue to result in increased competition; and |
| ● | other industry participants in the asset management business continuously seek to recruit our best and brightest investment professionals away from us. |
These and other factorscould reduce our earnings and revenues and adversely affect our business. In addition, if we are forced to compete with other alternativeasset managers on the basis of price, we may not be able to maintain our current base management and incentive fee structures.We have historically competed primarily on the performance of our funds, and not on the level of our fees relative to those ofour competitors. However, there is a risk that fees in the alternative investment management industry will decline, without regardto the historical performance of a manager, including our managers. Fee reductions on our existing or future funds, without correspondingdecreases in our cost structure, would adversely affect our revenues and distributable earnings.
Poor investmentperformance may decrease assets under management and reduce revenues from and the profitability of our asset management business.
Revenues from our assetmanagement business are primarily derived from asset management fees. Asset management fees are generally comprised of managementand incentive fees. Management fees are typically based on assets under management, and incentive fees are earned on a quarterlyor annual basis only if the return on our managed accounts exceeds a certain threshold return, or “highwater mark,”for each investor. We will not earn incentive fee income during a particular period, even when a fund had positive returns in thatperiod, if we do not generate cumulative performance that surpasses a highwater mark. If a fund experiences losses, we will notearn incentive fees with regard to investors in that fund until its returns exceed the relevant highwater mark.
In addition, investmentperformance is one of the most important factors in retaining existing investors and competing for new asset management business.Investment performance may be poor as a result of the current or future difficult market or economic conditions, including changesin interest rates or inflation, terrorism, widespread outbreaks of disease, such as the ongoing COVID-19 pandemic, or politicaluncertainty, our investment style, the particular investments that we make, and other factors. Poor investment performance mayresult in a decline in our revenues and income by causing (i) the net asset value of the assets under our management to decrease,which would result in lower management fees to us, (ii) lower investment returns, resulting in a reduction of incentive fee incometo us, and (iii) investor redemptions, which would result in lower fees to us because we would have fewer assets under management.
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To the extent our futureinvestment performance is perceived to be poor in either relative or absolute terms, the revenues and profitability of our assetmanagement business will likely be reduced and our ability to grow existing funds and raise new funds in the future will likelybe impaired.
The historical returns of our fundsmay not be indicative of the future results of our funds.
The historical returnsof our funds should not be considered indicative of the future results that should be expected from such funds or from any futurefunds we may raise. Our rates of returns reflect unrealized gains, as of the applicable measurement date, which may never be realizeddue to changes in market and other conditions not in our control that may adversely affect the ultimate value realized from theinvestments in a fund. The returns of our funds may have also benefited from investment opportunities and general market conditionsthat may not repeat themselves, and there can be no assurance that our current or future funds will be able to avail themselvesof profitable investment opportunities. Furthermore, the historical and potential future returns of the funds we manage also maynot necessarily bear any relationship to potential returns on our common stock.
We are subject to risks in using custodians.
Our asset managementsubsidiary and its managed funds depend on the services of custodians to settle and report securities transactions. In the eventof the insolvency of a custodian, our funds might not be able to recover equivalent assets in whole or in part as they will rankamong the custodian’s unsecured creditors in relation to assets which the custodian borrows, lends or otherwise uses. Inaddition, cash held by our funds with the custodian will not be segregated from the custodian’s own cash, and the funds willtherefore rank as unsecured creditors in relation thereto.
We manage debtinvestments that involve significant risks and potential additional liabilities.
GACP I., L.P. and GACPII, L.P., both direct lending funds of which our wholly owned subsidiary GACP is the general partner, and which are managed byWhiteHawk Capital Partners, L.P. pursuant to an investment advisory services agreement are may invest in secured debt issued bycompanies that have or may incur additional debt that is senior to the secured debt owned by the fund. In the event of insolvency,liquidation, dissolution, reorganization or bankruptcy of any such company, the owners of senior secured debt (i.e., the ownersof first priority liens) generally will be entitled to receive proceeds from any realization of the secured collateral until theyhave been reimbursed. At such time, the owners of junior secured debt (including, in certain circumstances, the fund) will be entitledto receive proceeds from the realization of the collateral securing such debt. There can be no assurances that the proceeds, ifany, from the sale of such collateral would be sufficient to satisfy the loan obligations secured by subordinate debt instruments.To the extent that the fund owns secured debt that is junior to other secured debt, the fund may lose the value of its entire investmentin such secured debt.
In addition, the fundmay invest in loans that are secured by a second lien on assets. Second lien loans have been a developed market for a relativelyshort period of time, and there is limited historical data on the performance of second lien loans in adverse economic circumstances.In addition, second lien loan products are subject to intercreditor arrangements with the holders of first lien indebtedness, pursuantto which the second lien holders have waived many of the rights of a secured creditor, and some rights of unsecured creditors,including rights in bankruptcy, which can materially affect recoveries. While there is broad market acceptance of some second lienintercreditor terms, no clear market standard has developed for certain other material intercreditor terms for second lien loanproducts. This variation in key intercreditor terms may result in dissimilar recoveries across otherwise similarly situated secondlien loans in insolvency or distressed situations. While uncertainty of recovery in an insolvency or distressed situation is inherentin all debt instruments, second lien loan products carry more risks than certain other debt products.
Risks Related to Our United Onlineand magicJack Businesses
UOL competes againstlarge companies, many of whom have significantly more financial and marketing resources, and our business will suffer if we areunable to compete successfully.
UOL competes with numerousproviders of broadband, mobile broadband and DSL services, as well as other dial-up Internet access providers, many of whom arelarge and have significantly more financial and marketing resources. The principal competitors for UOL’s mobile broadbandand DSL services include, among others, local exchange carriers, wireless and satellite service providers, and cable service providers.These competitors include established providers such as AT&T, Verizon, Sprint, and T-Mobile. UOL’s principal dial-upInternet access competitors include established online service and content providers, such as AOL and MSN, and independent nationalInternet service providers, such as EarthLink and its PeoplePC subsidiary. Dial-up Internet access services do not compete favorablywith broadband services with respect to connection speed and do not have a significant, if any, price advantage over certain broadbandservices. In addition, there are a number of mobile virtual network operators, some of which focus on pricing as their main sellingpoint. Certain portions of the U.S., primarily rural areas, currently have limited or no access to broadband services. However,the U.S. government has indicated its intention to facilitate the provision of broadband services to such areas. Such expansionof the availability of broadband services will increase the competition for Internet access subscribers in such areas and willlikely adversely affect the UOL business. In addition to competition from broadband, mobile broadband, and DSL providers, competitionamong dial-up Internet access service providers is intense and neither UOL’s pricing nor the features of UOL’s servicesprovides us with a significant competitive advantage, if any, over certain of UOL’s dial-up Internet access competitors.We expect that competition, particularly with respect to price, for broadband, mobile broadband, and DSL services, as well as dial-upInternet access services, will continue and may materially and adversely impact our business, financial condition, results of operations,and cash flows.
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Dial-up and DSLpay accounts may decline faster than expected and adversely impact our business.
A significant portionof UOL’s revenues and profits come from dial-up Internet and DSL access services and related services and advertising revenues.UOL’s dial-up and DSL Internet access pay accounts and revenues have been declining and are expected to continue to declinedue to the continued maturation of the market for dial-up and DSL Internet access, competitive pressures in the industry and limitedsales efforts. Consumers continue to migrate to broadband access, primarily due to the faster connection and download speeds providedby broadband access. Advanced applications such as online gaming, music downloads and videos require greater bandwidth for optimalperformance, which adds to the demand for broadband access. The pricing for basic broadband services has been declining as well,making it a more viable option for consumers. In addition, the popularity of accessing the Internet through tablets and mobiledevices has been growing and may accelerate the migration of consumers away from dial-up Internet access. The number of dial-upInternet access pay accounts has been adversely impacted by both a decrease in the number of new pay accounts signing up for UOL’sservices, as well as the impact of subscribers canceling their accounts, which we refer to as “churn.” Churn has increasedfrom time to time and may increase in the future. If we experience a higher than expected level of churn, it will make it moredifficult for us to increase or maintain the number of pay accounts, which could adversely affect our business, financial condition,results of operations, and cash flows.
We expect UOL’sdial-up and DSL Internet access pay accounts to continue to decline. As a result, related services revenues and the profitabilityof this segment may decline. The rate of decline in these revenues may continue to accelerate.
We may not be able toconsistently make a high level of expense reductions in the future. Continued declines in revenues relating to the UOL business,particularly if such declines accelerate, will materially and adversely impact the profitability of this business.
Failure to maintainor grow advertising revenues from UOL, including as a result of failing to increase or maintain the number of subscribers for UOL’sservices, could have a negative impact on advertising profitability.
Advertising revenuesare a key component of revenues and profitability from UOL. UOL’s services currently generate advertising revenues from searchplacements, display advertisements and online market research associated with Internet access and email services. Factors thathave caused, or may cause in the future, UOL’s advertising revenues to fluctuate include, without limitation, changes inthe number of visitors to UOL’s websites, active accounts or consumers purchasing our services and products, the effect of,changes to, or terminations of key advertising relationships, changes to UOL’s websites and advertising inventory, changesin applicable laws, regulations or business practices, including those related to behavioral or targeted advertising, user privacy,and taxation, changes in business models, changes in the online advertising market, changes in the economy, advertisers’budgeting and buying patterns, competition, and changes in usage of UOL’s services. Decreases in UOL’s advertisingrevenues are likely to adversely impact our profitability. Further, our successful operation and management of UOL, including theability to generate advertising revenues for UOL’s services, will depend in part upon our ability to increase or maintainthe number of subscribers for UOL’s services. A decline in the number of subscribers using UOL’s services could resultin decreased advertising revenues, and decreases in advertising revenues would adversely impact our profitability. The failureto increase or maintain the number of subscribers for UOL’s services could have a material adverse effect on advertisingrevenues and our profitability.
Interruption orfailure of the network, information systems or other technologies essential to the UOL business could impair our ability to provideservices relating to the UOL business, which could damage our reputation and harm our operating results.
Our successful operationof the UOL business depends on our ability to provide reliable service. Many of UOL’s products are supported by data centers.UOL’s network, data centers, central offices and those of UOL’s third-party service providers are vulnerable to damageor interruption from fires, earthquakes, hurricanes, tornados, floods and other natural disasters, terrorist attacks, power loss,capacity limitations, telecommunications failures, software and hardware defects or malfunctions, break ins, sabotage and vandalism,human error and other disruptions that are beyond our control. Some of the systems serving the UOL business are not fully redundant,and our disaster recovery or business continuity planning may not be adequate. The UOL business could also experience interruptionsdue to cable damage, theft of equipment, power outages, inclement weather and service failures of third-party service providers.The occurrence of any disruption or system failure or other significant disruption to business continuity may result in a lossof business, increase expenses, damage to reputation for providing reliable service, subject us to additional regulatory scrutinyor expose us to litigation and possible financial losses, any of which could adversely affect our business, results of operationsand cash flows.
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We may be accusedof infringing upon the intellectual property rights of third parties, which is costly to defend and could limit our ability touse certain technologies in the future.
From time to time thirdparties have alleged that UOL infringes on their intellectual property rights, including patent rights. We may be unaware of filedpatent applications and of issued patents that could be related to the products and services we acquired in the UOL acquisition.These claims are often made by patent holding companies that are not operating companies. The alleging parties generally seek royaltypayments for prior use as well as future royalty streams. Defending against disputes, litigation or other legal proceedings, whetheror not meritorious, may involve significant expense and diversion of management’s attention and resources from other matters.Due to the inherent uncertainties of litigation, we may not prevail in these actions. Both the costs of defending lawsuits andany settlements or judgments against us could adversely affect our results of operations and cash flows.
If there are eventsor circumstances affecting the reliability or security of the Internet, access to the websites related to the UOL business and/orthe ability to safeguard confidential information could be impaired causing a negative effect on the financial results of our businessoperations.
Our website infrastructureand the website infrastructure of UOL may be vulnerable to computer viruses, hacking or similar disruptive problems caused by customers,other Internet users, other connected Internet sites, and the interconnecting telecommunications networks. Such problems causedby third-parties could lead to interruptions, delays or cessation of service to the customers of the UOL products and services.Inappropriate use of the Internet by third-parties could also potentially jeopardize the security of confidential information storedin our computer system, which may deter individuals from becoming customers. There can be no assurance that any such measures wouldnot be circumvented in future. Dealing with problems caused by computer viruses or other inappropriate uses or security breachesmay require interruptions, delays or cessation of service to customers, which could have a material adverse effect on our business,financial condition and results of operations. The ongoing COVID-19 pandemic has put increased strain on the internet due to, amongother things, an increase in remote work and the effects on our business are difficult to estimate.
The UOL businessprocesses, stores and uses personal information and other data, which subjects us to governmental regulation and other legal obligationsrelated to privacy, and our actual or perceived failure to comply with such obligations could harm our business.
The UOL business receives,stores and processes personal information and other customer data, and UOL enables customers to share their personal informationwith each other and with third parties. There are numerous federal, state and local laws around the world regarding privacy andthe storing, sharing, use, processing, disclosure and protection of personal information and other customer data, the scope ofwhich are changing, subject to differing interpretations, and may be inconsistent between countries or conflict with other rules.We will generally comply with industry standards and are and will be subject to the terms of privacy policies and privacy-relatedobligations to third parties. We will strive to comply with all applicable laws, policies, legal obligations and industry codesof conduct relating to privacy and data protection, to the extent possible. However, it is possible that these obligations maybe interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other rulesor UOL’s practices. Any failure or perceived failure to comply with UOL’s privacy policies, privacy-related obligationsto customers or other third parties, or privacy-related legal obligations, or any compromise of security that results in the unauthorizedrelease or transfer of personally identifiable information or other customer data, may result in governmental enforcement actions,litigation or public statements against us by consumer advocacy groups or others and could cause customers to lose trust in us,which could have an adverse effect on our business. Additionally, if third parties we work with, such as customers, vendors ordevelopers, violate applicable laws or policies, such violations may also put our customers’ information at risk and couldin turn have an adverse effect on our business.
Our marketingefforts for UOL’s business may not be successful or may become more expensive, either of which could increase our costs andadversely impact our business, financial condition, results of operations, and cash flows.
We rely on relationshipsfor our UOL business with a wide variety of third parties, including Internet search providers such as Google, social networkingplatforms such as Facebook, Internet advertising networks, co-registration partners, retailers, distributors, television advertisingagencies, and direct marketers, to source new members and to promote or distribute our services and products. In addition, in connectionwith the launch of new services or products for our UOL business, we may spend a significant amount of resources on marketing.With any of our brands, services, and products, if our marketing activities are inefficient or unsuccessful, if important third-partyrelationships or marketing strategies, such as Internet search engine marketing and search engine optimization, become more expensiveor unavailable, or are suspended, modified, or terminated, for any reason, if there is an increase in the proportion of consumersvisiting our websites or purchasing our services and products by way of marketing channels with higher marketing costs as comparedto channels that have lower or no associated marketing costs, or if our marketing efforts do not result in our services and productsbeing prominently ranked in Internet search listings, our business, financial condition, results of operations, and cash flowscould be materially and adversely impacted.
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Our UOL businessis dependent on the availability of telecommunications services and compatibility with third-party systems and products.
Our UOL business substantiallydepends on the availability, capacity, affordability, reliability, and security of our telecommunications networks. Only a limitednumber of telecommunications providers offer the network and data services we currently require for our UOL business, and we purchasemost of our telecommunications services from a few providers. Some of our telecommunications services are provided pursuant toshort-term agreements that the providers can terminate or elect not to renew. In addition, some telecommunications providers maycease to offer network services for certain less populated areas, which would reduce the number of providers from which we maypurchase services and may entirely eliminate our ability to purchase services for certain areas. Currently, our mobile broadbandservice of our UOL business is entirely dependent upon services acquired from one service provider, and the devices required bythe provider can be used for only such provider’s service. If we are unable to maintain, renew or obtain a new agreementwith the telecommunications provider on acceptable terms, or the provider discontinues its services, our business, financial condition,results of operations, and cash flows could be materially and adversely affected. Sprint, which owns Clearwire, ceased using WiMAXtechnology on the Clearwire network. This affected our mobile broadband subscribers for our UOL business that utilized the Clearwirenetwork.
Our dial-up Internetaccess services of our UOL business also rely on their compatibility with other third-party systems, products and features, includingoperating systems. Incompatibility with third-party systems and products could adversely affect our ability to deliver our servicesor a user’s ability to access our services and could also adversely impact the distribution channels for our services. Ourdial-up Internet access services are dependent on dial-up modems and an increasing number of computer manufacturers, includingcertain manufacturers with whom we have distribution relationships, do not pre-load their new computers with dial-up modems, requiringthe user to separately acquire a modem to access our services. We cannot assure you that, as the dial-up Internet access marketdeclines and new technologies emerge, we will be able to continue to effectively distribute and deliver our services.
Government regulationscould adversely affect our business or force us to change our business practices.
The services that areprovided by UOL are subject to varying degrees of international, federal, state and local laws and regulation, including, withoutlimitation, those relating to taxation, bulk email or “spam,” advertising (including, without limitation, targetedor behavioral advertising), user privacy and data protection, consumer protection, antitrust, export, and unclaimed property. Compliancewith such laws and regulations, which in many instances are unclear or unsettled, is complex. New laws and regulations, such asthose being considered or recently enacted by certain states, the federal government, or international authorities related to automatic-renewalpractices, spam, user privacy, targeted or behavioral advertising, and taxation, could impact our revenues or certain of our businesspractices or those of our advertisers.
UOL resells broadbandInternet access services offered by other parties pursuant to wholesale agreements with those providers. In an order released inMarch 2015, the Federal Communications Commission (the “FCC”) classified retail broadband Internet access servicesas telecommunications services subject to regulation under Title II of the Communications Act. That ruling is subject to a pendingappeal. The classification of retail broadband Internet access services as telecommunications services means that providers ofthese services are subject to the general requirement that their charges, practices and classifications for telecommunicationsservices be “just and reasonable,” and that they refrain from engaging in any “unjust or unreasonable discrimination”with respect to their charges, practices or classifications. However, the FCC has not determined what, if any, regulations willapply to wholesale broadband Internet access services, and it is uncertain whether it will adopt requirements that will be favorableor unfavorable to us. It is also possible that the classification of retail broadband Internet access services will be overturnedon appeal, that Congress will adopt legislation reversing that decision, or that a future FCC will reverse that decision.
Broadband Internet accessis also currently classified as an “information service.” While current policy exempts broadband Internet access services(but not all broadband services) from contributing to the Universal Service Fund (“USF”), Congress and the FCC mayconsider expanding the USF contribution base to include broadband Internet access services. If broadband Internet access providersbecome subject to USF contribution obligations, they would likely impose a USF surcharge on end users. Such a surcharge will raisethe effective cost of our broadband services to UOL’s customers, which could adversely affect customer satisfaction and havean adverse impact on our revenues and profitability.
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Failure to make properpayments for federal USF contributions, FCC regulatory fees or other amounts mandated by federal and state regulations; failureto maintain proper state tariffs and certifications; failure to comply with federal, state or local laws and regulations; failureto obtain and maintain required licenses, franchises and permits; imposition of burdensome license, franchise or permit requirementsfor us to operate in public rights-of-way; and imposition of new burdensome or adverse regulatory requirements could limit thetypes of services we provide or the terms on which we provide these services.
We cannot predict theoutcome of any ongoing legislative initiatives or administrative or judicial proceedings or their potential impact upon the communicationsand information technology industries generally or upon the UOL business specifically. Any changes in the laws and regulationsapplicable to UOL, the enactment of any additional laws or regulations, or the failure to comply with, or increased enforcementactivity by regulators of, such laws and regulations, could significantly impact our services and products, our costs, or the mannerin which we or our advertisers conduct business, all of which could adversely impact our business, financial condition, resultsof operations, and cash flows and cause our business to suffer.
The FCC and some statesrequire us to obtain prior approval of certain major merger and acquisition transactions, such as the acquisition of control ofanother telecommunications carrier. Delays in obtaining such approvals could affect our ability to close proposed transactionsin a timely manner and could increase our costs and increase the risk of non-consummation of some transactions.
The market inwhich magicJack participates is highly competitive and if we do not compete effectively, our operating results may be harmed byloss of market share and revenues.
The telecommunicationsindustry is highly competitive. We face intense competition from traditional telephone companies, wireless companies, cable companiesand alternative voice communication providers and manufacturers of communication devices.
The principal competitorsfor our products and services include the traditional telephone service providers, such as AT&T, Inc., CenturyLink, Inc. andVerizon Communications Inc., which provide telephone service using the public switched telephone network. Certain of these traditionalproviders have also added, or are planning to add, broadband telephone services to their existing telephone and broadband offerings.We also face, or expect to face, competition from cable companies, such as Cablevision Systems Corp., Charter Communications, Inc.,Comcast Corporation, Cox Communications, Inc. and Time Warner Cable (a division of Time Warner Inc.), which offer broadband telephoneservices to their existing cable television and broadband offerings. Further, wireless providers, including AT&T Mobility,Inc., Sprint Corporation, T-Mobile USA Inc., and Verizon Wireless, Inc. offer services that some customers may prefer over wireline-basedservice. In the future, as wireless companies offer more minutes at lower prices, their services may become more attractive tocustomers as a replacement for broadband or wireline-based phone service.
We face competitionon magicJack device sales from Apple, Samsung, Motorola and other manufacturers of smart phones, tablets and other handheld wirelessdevices. Also, we compete against established alternative voice communication providers, such as Vonage, Google Voice, Ooma, andSkype, which is another non-interconnected voice provider, and may face competition from other large, well-capitalized Internetcompanies. In addition, we compete with independent broadband telephone service providers.
Increased competitionmay result in our competitors using aggressive business tactics, including providing financial incentives to customers, sellingtheir products or services at a discount or loss, offering products or services similar to our products and services on a bundledbasis at a discounted rate or no charge, announcing competing products or services combined with aggressive marketing efforts,and asserting intellectual property rights or claims, irrespective of their validity.
We believe that someof our existing competitors may choose to consolidate or may be acquired in the future. Additionally, some of our competitors mayenter into alliances or joint ventures with each other or establish or strengthen relationships with other third parties. Any suchconsolidation, acquisition, alliance, joint venture or other relationship could adversely affect our ability to compete effectively,lead to pricing pressure, our loss of market share and could harm our business, results of operations and financial condition.
magicJack mayface difficulty in attracting new customers, and if we fail to attract new customers, our business and results of operations maysuffer.
Most traditional wirelineand wireless telephone service providers and cable companies are substantially larger and better capitalized than us and have theadvantage of a large existing customer base. Because most of our customers are purchasing communications services from one or moreof these providers, our success is dependent upon our ability to attract customers away from their existing providers. In addition,these competitors could focus their substantial financial resources to develop competing technology that may be more attractiveto potential customers than what we offer. Our competitors’ financial resources may allow them to offer services at pricesbelow cost or even for free in order to maintain and gain market share or otherwise improve their competitive positions.
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magicJack’s competitorsalso could use their greater financial resources to offer broadband telephone service with more attractive service packages thatinclude on-site installation and more robust customer service. In addition, because of the other services that our competitorsprovide, they may choose to offer broadband telephone service as part of a bundle that includes other products, such as video,high speed Internet access and wireless telephone service, which we do not offer at the present time. This bundle may enable ourcompetitors to offer broadband telephone service at prices with which we may not be able to compete or to offer functionality thatintegrates broadband telephone service with their other offerings, both of which may be more desirable to consumers. Any of thesecompetitive factors could make it more difficult for us to attract and retain customers to our products, and cause us to lowerour prices in order to compete and reduce our market share and revenues.
magicJack maybe unable to obtain enough phone numbers in desirable area codes to meet demand, which may adversely affect our ability to attractnew customers and our results of operations.
magicJack’s operationsare subject to varying degrees of federal and state regulation. It currently allows customers to select the area code for theirdesired phone number from a list of available area codes in cities throughout much of the United States. This selection may becomelimited if we are unable to obtain phone numbers, or a sufficient quantity of phone numbers, including certain area codes, dueto exhaustion and consequent shortages of numbers in those area codes, restrictions imposed by federal or state regulatory agencies,or a lack of telephone numbers made available to us by third parties. If we are unable to provide our customers with a nationwideselection of phone numbers, or any phone numbers at all, in all geographical areas and is unable to obtain telephone numbers fromanother alternative source, or is required to incur significant new costs in connection with obtaining such phone numbers, ourrelationships with current and future customers may be damaged, causing a shortfall in expected revenue, increased customer attrition,and an inability to attract new customers. As a result, our business, results of operations and financial condition could be materiallyand adversely affected.
If magicJack’sservices are not commercially accepted by customers, our prospects for growth will suffer.
Our success in derivinga substantial amount of revenues from magicJack’s broadband telephone service offering sold to consumers and businesses relieson the commercial acceptance of our offering from consumers and business. Although we currently sell our services to a number ofcustomers, it cannot be certain that future customers will find our services attractive. If customer demand for our services doesnot develop or develops more slowly than anticipated, it would have a material adverse effect on our business, results of operationsand financial condition. Our success relies on the commercial acceptance of our offering from these advertisers and retailers.magicJack is not currently selling its advertising and retailing services and it cannot be certain future online advertisers andretailers will find its services attractive. If demand for these services does not develop or develops more slowly than anticipated,it would have a material adverse effect on our business, results of operations and financial condition.
If magicJack isunable to retain its existing customers, our revenue and results of operations would be adversely affected.
We offer magicJack servicespursuant to a subscriber agreement that ranges generally from one month to five years in duration and allows our customers to gainaccess to our servers for telephone calls. Our customers do not have an obligation to renew their subscriber agreement after theirinitial term period expires, and these agreements may not be renewed on the same or on more profitable terms. As a result, ourability to grow depends in part on retaining customers for renewals. We may not be able to accurately predict future trends incustomer renewals, and our customers’ renewal rates may decline or fluctuate because of several factors, including theirsatisfaction or dissatisfaction with our services, the prices of our services, the fees imposed by government entities, the pricesof comparable services offered by our competitors or reductions in our customers’ spending levels. If our customers do notrenew their services, renew on less favorable terms, or do not purchase additional functionality, our revenue may grow more slowlythan expected or decline, and our profitability and gross margins may be harmed.
The market formagicJack’s services and products is characterized by rapidly changing technology and our success will depend on our abilityto enhance our existing service and product offerings and to introduce new services and products on a timely and cost effectivebasis.
The market for magicJack’sservices and products is characterized by rapidly changing enabling technology, frequent enhancements and evolving industry standards.Our continued success depends on our ability to accurately anticipate the evolution of new products and technologies and to enhanceour existing products and services. Historically, several factors have deterred consumers and businesses from using voice overbroadband service, including security concerns, inconsistent quality of service, increasing broadband traffic and incompatiblesoftware products. If we are unable to continue to address those concerns and foster greater consumer demand for our products andservices, our business and results of operations will be adversely affected.
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Our success also dependson our ability to develop and introduce innovative new magicJack services and products that gain market acceptance. We may notbe successful in selecting, developing, manufacturing and marketing new products and services or enhancing existing products andservices on a timely basis. We may experience difficulties with software development, industry standards, design or marketing thatcould delay or prevent our development, introduction or implementation of new products, services and enhancements. The introductionof new products or services by competitors, the emergence of new industry standards or the development of entirely new technologiesto replace existing service offerings could render our existing or future services obsolete. If our services become obsolete dueto wide-spread adoption of alternative connectivity technologies, our ability to generate revenue may be impaired. In addition,any new markets into which we attempt to sell our services, including new countries or regions, may not be receptive. If we areunable to successfully develop or acquire new products or services, enhance our existing products or services to anticipate andmeet customer preferences or sell magicJack products and services into new markets, our revenue and results of operations wouldbe adversely affected.
We may be unsuccessfulin protecting our proprietary rights or may have to defend ourselves against claims of infringement, which could impair or significantlyaffect our business.
Our means of protectingour proprietary rights may not be adequate and our competitors may independently develop technology that is similar ours. Legalprotections afford only limited protection for our technology. The laws of many countries do not protect our proprietary rightsto as great an extent as do the laws of the United States. Despite our efforts to protect our proprietary rights, unauthorizedparties have in the past attempted, and may in the future attempt, to copy aspects of our products or to obtain and use informationthat it regards as proprietary. Third parties may also design around our proprietary rights, which may render our protected productsless valuable, if the design around is favorably received in the marketplace. In addition, if any our products or the technologyunderlying our products is covered by third-party patents or other intellectual property rights, we could be subject to variouslegal actions.
We cannot assure youthat our products do not infringe intellectual property rights held by others or that they will not in the future. Third partiesmay assert infringement, misappropriation, or breach of license claims against us from time to time. Such claims could cause usto incur substantial liabilities and to suspend or permanently cease the use of critical technologies or processes or the productionor sale of major products. Litigation may be necessary to enforce our intellectual property rights, to protect our trade secrets,to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement or invalidity,misappropriation, or other claims. Any such litigation could result in substantial costs and diversion of our resources, whichin turn could materially adversely affect our business and financial condition. Moreover, any settlement of or adverse judgmentresulting from such litigation could require us to obtain a license to continue to use the technology that is the subject of theclaim, or otherwise restrict or prohibit our use of the technology. Any required licenses may not be available to us on acceptableterms, if at all. If we attempt to design around the technology at issue or to find another provider of suitable alternative technologyto permit it to continue offering applicable software or product solutions, our continued supply of software or product solutionscould be disrupted or our introduction of new or enhanced software or products could be significantly delayed.
magicJack’sproducts must comply with various domestic and international regulations and standards and failure to do so could have an adverseeffect on our business, operating results and financial condition.
magicJack’s productsmust comply with various domestic and international regulations and standards defined by regulatory agencies. If it does not complywith existing or evolving industry standards and other regulatory requirements or if we fail to obtain in a timely manner any requireddomestic or foreign regulatory approvals or certificates, we will not be able to sell our products where these standards or regulationsapply, which may harm our business. Moreover, distribution partners or customers may require us, or we may otherwise deem it necessaryor advisable, to alter our products to address actual or anticipated changes in the regulatory environment. Our inability to alterour products to address these requirements and any regulatory changes could have a material adverse effect on our business, financialcondition, and operating results.
magicJack’semergency and E911 calling services are different from those offered by traditional wireline telephone companies and may exposeus to significant liability.
While we do not believethat we are currently subject to regulatory requirements to provide such capability, we provide our customers with emergency callingservices/E911 calling services (“E911”) that significantly differ from the emergency calling services offered by traditionalwireline telephone companies. Those differences may cause significant delays, or even failures, in callers’ receipt of theemergency assistance they need. Traditional wireline telephone companies route emergency calls from a fixed location over a dedicatedinfrastructure directly to an emergency services dispatcher at the public safety answering point (“ PSAP ”) inthe caller’s area. Generally, the dispatcher automatically receives the caller’s phone number and actual location information.Because the magicJack devices are portable or nomadic, the only way we can determine to which PSAP to route an emergency call,and the only location information that our E911 service can transmit to a dispatcher at a PSAP is the information that our customershave registered with us. A customer’s registered location may be different from the customer’s actual location at thetime of the call because customers can use their magicJack devices to make calls almost anywhere a broadband connection is available.Significant delays may occur in a customer updating its registered location information, and in applicable databases being updatedand new routing implemented once a customer has provided new information. If our customers encounter delays when making emergencyservices calls and any inability to route emergency calls properly, or of the answering point to automatically recognize the caller’slocation or telephone number, such delays can have devastating consequences. Customers may, in the future, attempt to hold us responsiblefor any loss, damage, personal injury or death suffered as a result.
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Traditional phone companiesalso may be unable to provide the precise location or the caller’s telephone number when their customers place emergencycalls. However, traditional phone companies are covered by federal legislation exempting them from liability for failures of emergencycalling services, and magicJack is not afforded such protection. In addition, magicJack has lost, and may in the future lose, existingand prospective customers because of the limitations inherent in our emergency calling services. Additionally, service interruptionsfrom our third-party providers could cause failures in our customers’ access to E911 services. Any of these factors couldcause us to lose revenues, incur greater expenses or cause our reputation or financial results to suffer.
State and localgovernments may seek to impose E911 fees.
Many state and localgovernments have sought to impose fees on customers of VoIP providers, or to collect fees from VoIP providers, to support implementationof E911 services in their area. The application of such fees with respect to magicJack users and use is not clear because variousstatutes and regulations may not cover our services, we do not bill our customers monthly, nor do we bill customers at all fortelecommunication services. We may also not know the end user’s location because the magicJack devices and services are nomadic.Should a regulatory authority require payment of money from us for such support, we may be required to develop a mechanism to collectfees from our customers, which may or may not be satisfactory to the entity requesting us to be a billing agent. We cannot predictwhether the collection of such additional fees or limitations on where our services are available would impact customers’interest in purchasing our products.
In settlement of litigation,magicJack agreed that it would, at least once a year, issue bills for 911 emergency calling services to each user who has accessto 911 services through their magicJack services, and who has provided a valid address in a U.S. jurisdiction that provides accessto 911 services and which is legally empowered to impose 911 charges on such users in accordance with applicable state and/or locallaw.
Certain E911 regulatoryauthorities have asserted or may assert in the future that we are liable for damages, including end user assessed E911 taxes, surchargesand/or fees, for not having billed and collected E911 fees from our customers in the past or in the future. If a jurisdiction wereto prevail in such claims, the decision could have a material adverse effect on our financial condition and results of operations.
Increases in creditcard processing fees and high chargeback costs would increase our operating expenses and adversely affect our results of operations,and an adverse change in, or the termination of, magicJack’s relationship with any major credit card company would have asevere, negative impact on our business.
A significant numberof magicJack’s customers purchase its products through magicJack’s website and pay for its products and services usingcredit or debit cards. The major credit card companies or the issuing banks may increase the fees that they charge for transactionsusing their cards. An increase in those fees would require us to either increase the prices we charge for our products, or suffera negative impact on our profitability, either of which could adversely affect our business, financial condition and results ofoperations.
We have potential liabilityfor chargebacks associated with the transactions we process, or that are processed on our behalf by merchants selling our products.If a customer returns his or her magicJack products at any time, or claims that magicJack’s product was purchased fraudulently,the returned product is “charged back” to magicJack or its bank, as applicable. If magicJack or its sponsoring banksare unable to collect the chargeback from the merchant’s account, or, if the merchant refuses or is financially unable, dueto bankruptcy or other reasons, to reimburse the merchant’s bank for the chargeback, we bear the loss for the amount of therefund paid.
We are vulnerable tocredit card fraud, as we sell magicJack products directly to customers through our website. Card fraud occurs when a customer usesa stolen card (or a stolen card number in a card-not-present-transaction) to purchase merchandise or services. In a traditionalcard-present transaction, if the merchant swipes the card, receives authorization for the transaction from the card issuing bankand verifies the signature on the back of the card against the paper receipt signed by the customer, the card issuing bank remainsliable for any loss. In a fraudulent card-not-present transaction, even if the merchant or magicJack receive authorization forthe transaction, magicJack or the merchant are liable for any loss arising from the transaction. Because sales made directly frommagicJack’s website are card-not-present transactions, we are more vulnerable to customer fraud. We are also subject to actsof consumer fraud by customers that purchase magicJack products and services and subsequently claim that such purchases were notmade.
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In addition, as a resultof high chargeback rates or other reasons beyond our control, the credit card companies or issuing bank may terminate their relationshipwith magicJack, and there are no assurances that it will be able to enter into a new credit card processing agreement on similarterms, if at all. Upon a termination, if magicJack’s credit card processor does not assist it in transitioning its businessto another credit card processor, or if magicJack were not able to obtain a new credit card processor, the negative impact on ourliquidity likely would be significant. The credit card processor may also prohibit magicJack from billing discounts annually orfor any other reason. Any increases in the magicJack’s credit card fees could adversely affect our results of operations,particularly if we elect not to raise our service rates to offset the increase. The termination of magicJack’s ability toprocess payments on any major credit or debit card, due to high chargebacks or otherwise, would significantly impair our abilityto operate our business.
Flaws in magicJack’stechnology and systems could cause delays or interruptions of service, damage our reputation, cause us to lose customers and limitour growth.
Our service could bedisrupted by problems with magicJack technology and systems, such as malfunctions in our software or other facilities and overloadingof our servers. Our customers could experience interruptions in the future as a result of these types of problems. Interruptionscould in the future cause us to lose customers, which could adversely affect our revenue and profitability. In addition, becausemagicJack’s systems and our customers’ ability to use our services are Internet-dependent, our services may be subjectto “hacker attacks” from the Internet, which could have a significant impact on our systems and services. If serviceinterruptions adversely affect the perceived reliability of our service, it may have difficulty attracting and retaining customersand our brand reputation and growth may suffer.
We depend on overseasmanufacturers, and for certain magicJack products, third-party suppliers, and our reputation and results of operations would beharmed if these manufacturers or suppliers fail to meet magicJack’s requirements.
The manufacture of themagicJack devices is conducted by a manufacturing company in China, and certain parts are produced in Taiwan and Hong Kong. Thesemanufacturers supply substantially all of the raw materials and provide all facilities and labor required to manufacture our products.If these companies were to terminate their arrangements with us or fail to provide the required capacity and quality on a timelybasis, either due to actions of the manufacturers; earthquakes, typhoons, tsunamis, fires, floods, or other natural disasters;or the actions of their respective governments, we would be unable to manufacture our products until replacement contract manufacturingservices could be obtained. To qualify a new contract manufacturer, familiarize it with the magicJack products, quality standardsand other requirements, and commence volume production is a costly and time-consuming process. We cannot assure you that we wouldbe able to establish alternative manufacturing relationships on acceptable terms or in a timely manner that would not cause disruptionsin our supply. Any interruption in the manufacture of our products would be likely to result in delays in shipment, lost salesand revenue and damage to our reputation in the market, all of which would harm our business and results of operations. In addition,while the magicJack contract obligations with its contract manufacturer in China is denominated in U.S. dollars, changes in currencyexchange rates could impact our suppliers and increase our prices.
We rely on independentretailers to sell the magicJack devices, and disruption to these channels would harm our business.
Because we sell a significantamount of the magicJack devices, other devices and certain services to independent retailers, we are subject to many risks, includingrisks related to their inventory levels and support for magicJack’s products. In particular, magicJack’s retailersmaintain significant levels of our products in their inventories. If retailers attempt to reduce their levels of inventory or ifthey do not maintain sufficient levels to meet customer demand, our sales could be negatively impacted.
The retailers who sellmagicJack products also sell products offered by its competitors. If these competitors offer the retailers more favorable terms,those retailers may de-emphasize or decline to carry magicJack’s products. In the future, we may not be able to retain orattract a sufficient number of qualified retailers. If we are unable to maintain successful relationships with retailers or toexpand our distribution channels, our business will suffer.
To continue this methodof sales, we will have to allocate resources to train vendors, systems integrators and business partners as to the use of our products,resulting in additional costs and additional time until sales by such vendors, systems integrators and business partners are madefeasible. Our business depends to a certain extent upon the success of such channels and the broad market acceptance of our products.To the extent that our channels are unsuccessful in selling our products, our revenues and operating results will be adverselyaffected.
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Many factors out ofour control could interfere with our ability to market, license, implement or support magicJack products with any of our channels,which in turn could harm our business. These factors include, but are not limited to, a change in the business strategy of magicJack’schannels, the introduction of competitive product offerings by other companies that are sold through one or more of its channels,potential contract defaults by one or more of its channels, bankruptcy of one or more distribution channel, or changes in ownershipor management of one or more of its channels. For example, in February 2015, RadioShack Corporation, one of magicJack’s retailcustomers, filed a voluntary petition in bankruptcy court. magicJack was owed $1.3 million by RadioShack which it did not collectand sales to RadioShack were ceased to limit exposure. magicJack made limited sales to the RadioShack entity that emerged fromthe bankruptcy proceedings and terminated its relationship with that entity effective as of October 27, 2016. Some of magicJack’scompetitors may have stronger relationships with its channels than magicJack does or offer more favorable terms with respect totheir products, and magicJack has limited control, if any, as to whether those channels implement its products rather than itscompetitors’ products or whether they devote resources to market and support its competitors’ products rather thanits offerings. If magicJack fails to maintain relationships with these channels, fails to develop new channels, fails to effectivelymanage, train, or provide incentives to existing channels or if these channels are not successful in their sales efforts, salesof magicJack’s products may decrease and our operating results would suffer. The independent retailers we rely on may beimpacted by the ongoing COVID-19 pandemic, which has resulted in mandatory store closures of uncertain duration due to social distancingmeasures imposed to control the pandemic and they may be limited in their ability to sell magicJack devices to customers.
We may not beable to maintain adequate customer care during periods of growth or in connection with our addition of new and complex devicesor features, which could adversely affect our ability to grow and cause our financial results to be negatively impacted.
We consider our offshorecustomer care to be critically important to acquiring and retaining customers. A portion of our customer care for magicJack productsis provided by third parties located in Costa Rica and the Philippines. This approach exposes us to the risk that we may not maintainservice quality, control or effective management within these business operations. The increased elements of risk that arise fromconducting certain operating processes in some jurisdictions could lead to an increase in reputational risk. Interruptions in ourcustomer care caused by disruptions at our third-party facilities may cause us to lose customers, which could adversely affectour revenue and profitability. If our customer base expands rapidly in the U.S. or abroad, we may not be able to expand our outsourcedcustomer care operations quickly enough to meet the needs of our customer base, and the quality of our customer care will sufferand our access right renewal rate may decrease. As we broaden our magicJack offerings and its customers build increasingly complexhome networking environments, we will face additional challenges in training our customer care staff. We could face a high turnoverrate among our customer service providers. We intend to have our customer care provider hire and train customer care representativesin order to meet the needs of our customer base. If they are unable to hire, train and retain sufficient personnel to provide adequatecustomer care, we may experience slower growth, increased costs and higher levels of customer attrition, which would adverselyaffect our business and results of operations.
If we are unableto maintain an effective process for local number portability provisioning, our growth may be negatively impacted.
We comply with requestsfor local number portability from our customers. Local number portability means that our customers can retain their existing telephonenumbers when subscribing to magicJack’s services, and would in turn allow former customers to retain their telephone numbersshould they subscribe to another carrier. If we are unable to maintain the technology to expedite porting our customers’numbers, demand for our services may be reduced, and this will adversely affect our revenue and profitability.
If we cannot continueto obtain key switching elements from magicJack’s primary competitors on acceptable terms, we may not be able to offer ourlocal voice and data services on a profitable basis, if at all.
We will not be ableto provide our local voice and data services on a profitable basis, if at all, unless we are able to obtain key switching elementsfrom some of magicJack’s primary competitors on acceptable terms. To offer local voice and data services in a market, wemust connect our servers with other carriers in a specific market. This relationship is governed by an interconnection agreementor carrier service agreement between us and that carrier. magicJack has such agreements with Verizon, AT&T, XO CommunicationsServices and CenturyLink in a majority of its markets. If we are unable to continue these relationships, enter into new interconnectionagreements or carrier service agreements with additional carriers in other markets or if these providers liquidate or file forbankruptcy, our business and profitability may suffer.
Regulatory initiativesmay continue to reduce the maximum rates we are permitted to charge long distance service providers for completing calls by ourcustomers to customers served by our servers.
The rates that we chargeand is charged by service providers for terminating calls by their customers to customers served by its servers, and for transferringcalls by its customers onto other carriers, cannot exceed rates determined by regulatory authorities. In 2011, the FCC adoptedan order fundamentally overhauling its existing intercarrier compensation (“ ICC ”) rules, which govern paymentsbetween carriers for exchange traffic. This order established a new ICC regime that will result in the elimination of virtuallyall terminating switched access charges and reciprocal compensation payments over a transition period that will end in 2020. Thereductions resulting from these new ICC rules have affected and will continue to affect our revenues and results of operations.
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Regulation ofbroadband telephone services are developing and therefore uncertain; and future legislative, regulatory or judicial actions couldadversely impact our business and expose us to liability.
The current regulatoryenvironment for broadband telephone services is developing and therefore uncertain. The United States and other countries havebegun to assert regulatory authority over broadband telephone service and are continuing to evaluate how broadband telephone servicewill be regulated in the future. Both the application of existing rules to us and our competitors and the effects of future regulatorydevelopments are uncertain. Future legislative, judicial or other regulatory actions could have a negative effect on our business.If its VoIP telephony service or our other magicJack products and services become subject to the rules and regulations applicableto telecommunications providers, if current broadband telephone service rules are expanded and applied to us, or if additionalrules and regulations applicable specifically to broadband telephone services are adopted, we may incur significant compliancecosts, and we may have to restructure our service offerings, exit certain markets or start charging for our services at least tothe extent of regulatory costs or requirements, any of which could cause our services to be less attractive to customers. We arefaced, and may continue to face, difficulty collecting such charges from our customers and/or carriers, and collecting such chargesmay cause us to incur legal fees. We may be unsuccessful in collecting all of the regulatory fees owed to us. The imposition ofany such additional regulatory fees, charges, taxes and regulations on VoIP communications services could materially increase ourcosts and may limit or eliminate our competitive pricing advantages.
Regulatory and governmentalagencies may determine that we should be subject to rules applicable to certain broadband telephone service providers or seek toimpose new or increased fees, taxes, and administrative burdens on broadband telephone service providers. We also may change ourproduct and service offerings in a manner that subjects us to greater regulation and taxation. Such obligations could include requirementsthat we contribute directly to federal or state Universal Service Funds. We may also be required to meet various disability accessrequirements, number portability obligations, and interception or wiretapping requirements, such as the Communications Assistancefor Law Enforcement Act. The imposition of such regulatory obligations or the imposition of additional federal, state or localtaxes on our services could increase our cost of doing business and limit our growth.
We offer our magicJackproducts and services in other countries, and therefore could also be subject to regulatory risks in each such foreign jurisdiction,including the risk that regulations in some jurisdictions will prohibit us from providing our services cost-effectively or at all,which could limit our growth. Currently, there are several countries where regulations prohibit us from offering service. In addition,because customers can use our services almost anywhere that a broadband Internet connection is available, including countries whereproviding broadband telephone service is illegal, the governments of those countries may attempt to assert jurisdiction over us.Violations of these laws and regulations could result in fines, criminal sanctions against us, our officers or our employees, andprohibitions on the conduct of our business. Any such violations could include prohibitions on our ability to offer our productsand services in one or more countries, could delay or prevent potential acquisitions, expose us to significant liability and regulationand could also materially damage our reputation, our brand, our international expansion efforts, our ability to attract and retainemployees, our business and our operating results. Our success depends, in part, on our ability to anticipate these risks and managethese difficulties.
The success ofour business relies on customers’ continued and unimpeded access to broadband service. Providers of broadband services maybe able to block our services or charge their customers more for also using our services, which could adversely affect our revenueand growth.
Our customers must havebroadband access to the Internet in order to use our service. Providers of broadband access, some of whom are also competing providersof voice services, may take measures that affect their customers’ ability to use our service, such as degrading the qualityof the data packets they transmit over their lines, giving those packets low priority, giving other packets higher priority thanours, blocking our packets entirely or attempting to charge their customers more for also using our services.
In 2015, the FCC adoptednet neutrality rules that prohibited broadband providers from: 1) blocking legal content, applications, services, or non-harmfuldevices; 2) impairing or degrading lawful Internet traffic on the basis of content, applications, services, or non-harmful devices;3) engaging in paid prioritization by favoring some lawful Internet traffic over other lawful traffic in exchange for considerationof any kind or by prioritizing content and services of their affiliates; and 4) unreasonably interfering with or unreasonably disadvantagingthe ability of consumers to select, access, and use the lawful content, applications, services, or devices of their choosing; orof edge providers to make lawful content, applications, services, or devices available to consumers. In doing so, the FCC reclassifiedbroadband Internet access - the retail broadband service mass-market customers buy from cable, phone, and wireless providers -as a telecommunications service regulated under Title II of the Communications Act of 1934, although the FCC agreed to forbearfrom many requirements of Title II. Significantly, these rules applied equally to fixed and mobile broadband networks.
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After the FCC’snew net neutrality rules went into effect in June 2015, various broadband providers and their trade associations challenged theFCC’s decision before the U.S. Court of Appeals for the D.C. Circuit. In June 2016, the D.C. Circuit issued its decisionupholding the FCC’s rules. The D.C. Circuit also denied various petitions seeking rehearing en banc of the court’sdecision. Various parties have sought review by the United States Supreme Court of the D.C. Circuit’s decision, which remainspending. We cannot predict the outcome of these proceedings.
In December 2017, theFCC adopted its “Restoring Internet Freedom Order,” which: 1) restored the classification of broadband Internet accessservices as unregulated information services, ending Title II regulation of these services; 2) eliminated the FCC’s three“bright-line” net neutrality rules; 3) eliminated the FCC’s “general conduct” rule; and 4) adopteda new transparency rule.
Multiple parties filedpetitions seeking judicial review of the “Restoring Internet Freedom Order,” which were consolidated and heard by theUnited States Court of Appeals for the D.C. Circuit. In October 2019, the D.C. Circuit largely upheld the FCC decision to eliminatelegal prohibitions against broadband providers blocking, throttling, or otherwise degrading the quality of our data packets orattempting to extract additional fees from us or our customers, which could adversely impact our business.
We may be boundby certain FCC regulations relating to the provision of E911 service, and if we fail to comply with FCC regulations requiring usto provide E911 emergency calling services, we may be subject to fines or penalties.
In 2005, the FCC issuedregulations requiring interconnected voice-over broadband providers to provide E911 services and to notify customers of any differencesbetween the broadband telephone service emergency calling services and those available through traditional telephone providersand obtain affirmative acknowledgments from customers of those notifications. In 2019, the FCC adopted rules broadening the scopeof its E911 requirements, including imposing 911 obligations on outbound VoIP providers – obligations that will take effectin two years.
Limitations on our abilityto provide E911 service or comply with the FCC’s new mandates could materially limit our growth and have a material adverseeffect on our profitability. We could be subjected to various fines and forfeitures. FCC rulings could also subject us to greaterregulation in some states.
Regulatory rulingsand/or carrier disputes could affect the manner in which we interconnect and exchange traffic with other providers and the costsand revenues associated with doing so.
We exchange calls withother providers pursuant to applicable law and interconnection agreements and other carrier contracts that define the rates, terms,and conditions applicable to such traffic exchange. The calls we exchange originate from and terminate to a customer that usesa broadband Internet connection to access our services and are routed using telephone numbers of the customer’s choosing.There is uncertainty, however, with respect to intercarrier compensation for such traffic while rules continue to be challengedin various courts. The FCC Report and Order issued in November 2011 has asserted its jurisdiction over such traffic. Various statecommissions have also issued rulings with respect to the exchange of different categories of traffic under interconnection agreements.To the extent that another provider were to assert that the traffic we exchanges with them is subject to higher levels of compensationthan we, or the third parties terminating our traffic to the PSTN, pay today (if any), or if other providers from whom we currentlycollect compensation for the exchange of such traffic refuse to pay it going forward, we may need to seek regulatory relief toresolve such a dispute. Given the recent changes to the intercarrier compensation regime, we cannot guarantee that the outcomeof any proceeding would be favorable, and an unfavorable ruling could adversely affect the amounts we collect and/or pay to otherproviders in connection with the exchange of our traffic. The FCC clarified in January 2015 that its VoIP symmetry rule does notrequire a CLEC or its VoIP provider partner to provide the physical last-mile facility to the VoIP provider’s end user customersin order to provide the functional equivalent of end office switching, and thus for the CLEC to be eligible to assess access chargesfor this service. The ruling confirms that the VoIP symmetry rule is technology and facilities neutral and applies regardless ofwhether a CLEC’s VoIP partner is a facilities-based or over-the-top VoIP provider. However, in November 2016, the U.S. Courtof Appeals for the D.C. Circuit vacated the FCC’s ruling. In December 2019, the Federal Communications Commission (FCC) issuedan order on remand revisiting its interpretation of the VoIP symmetry rule, concluding that LECs may assesses end office switchedaccess charges only if the LEC or its VoIP partner provides a physical connection to the last-mile facilities used to serve anend user. If neither the LEC nor its VoIP partner provides such physical connection, it is not providing the functional equivalentof end office switched access and the LEC may not assess end office switched access charges. The FCC also decided to give its orderretroactive effect to “prevent an undue hardship being worked upon those parties who properly interpreted the VoIP SymmetryRule and have been in disputes ever since.” We are still assessing the impact of this recent FCC order that will affect theamounts we collect and/or pay to other providers in connection with the exchange of our traffic.
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Server failuresor system breaches could cause delays or adversely affect our service quality, which may cause us to lose customers and revenue.
In operating our servers,we may be unable to connect and manage a large number of customers or a large quantity of traffic at high speeds. Any failure orperceived failure to achieve or maintain high-speed data transmission could significantly reduce demand for our magicJack servicesand adversely affect our operating results. In addition, computer viruses, break-ins, human error, natural disasters and otherproblems may disrupt our servers. The system security and stability measures we implement may be circumvented in the future orotherwise fail to prevent the disruption of our services. The costs and resources required to eliminate computer viruses and othersecurity problems may result in interruptions, delays or cessation of services to our customers, which could decrease demand, decreaseour revenue and slow our planned expansion.
Hardware and softwarefailures, delays in the operation of magicJack’s computer and communications systems or the failure to implement system enhancementsmay harm our business.
Our success dependson the efficient and uninterrupted operation of magicJack’s software and communications systems. A failure of our serverscould impede the delivery of services, customer orders and day-to-day management of our business and could result in the corruptionor loss of data. Despite any precautions we may take, damage from fire, floods, hurricanes, power loss, telecommunications failures,computer viruses, break-ins and similar events at our various facilities could result in interruptions in the flow of data to ourservers and from our servers to our customers. In addition, any failure by our computer environment to provide our required telephonecommunications capacity could result in interruptions in our service. Additionally, significant delays in the planned deliveryof system enhancements and improvements, or inadequate performance of the systems once they are completed, could damage our reputationand harm our business. Finally, long-term disruptions in infrastructure caused by events such as natural disasters, the outbreakof war, the escalation of hostilities, and acts of terrorism (particularly involving cities in which it has offices) could adverselyaffect our business. Although we maintain general liability insurance, including coverage for errors and omissions, this coveragemay be inadequate, or may not be available in the future on reasonable terms, or at all. We cannot assure you that this policywill cover any claim against us for loss of data or other indirect or consequential damages and defending a lawsuit, regardlessof its merit, could be costly and divert management’s attention. In addition to potential liability, if we experience interruptionsin our ability to supply our services, our reputation could be harmed and we could lose customers.
Our magicJackservice requires an operative broadband connection, and if the adoption of broadband does not progress as expected, the marketfor our services will not grow and we may not be able to grow our business and increase our revenue.
Use of magicJack’sservice requires that the user be a subscriber to an existing broadband Internet service, most typically provided through a cableor digital subscriber line, or DSL, connection. Although the number of broadband subscribers in the U.S. and worldwide has grownsignificantly over the last five years, this service has not yet been adopted by all consumers and is not available in every partof the United States and Canada, particularly rural locations. If the adoption of broadband services does not continue to grow,the market for our services may not grow.
Our magicJackbusiness is subject to privacy and online security risks, including security breaches, and we could be liable for such breachesof security. If we are unable to protect the privacy of our customers making calls using our service, or information obtained fromour customers in connection with their use or payment of our services, in violation of privacy or security laws or expectations,we could be subject to significant liability and damage to our reputation.
Although we have developedsystems and processes that are designed to protect customer information and prevent fraudulent transactions, data loss and othersecurity breaches, such systems and processes may not be sufficient to prevent fraudulent transactions, data loss and other securitybreaches. Failure to prevent or mitigate such breaches may adversely affect our operating results.
Customers may believethat using our services to make and receive telephone calls using their broadband connection could result in a reduction of theirprivacy, as compared to traditional wireline carriers. Additionally, our website, www.magicJack.com, serves as an online salesportal . We currently obtain and retain personal information about our website users in connection with such purchases. Inaddition, we obtain personal information about our customers as part of their registration to use our products and services. Federal,state and foreign governments have enacted or may enact laws or regulations regarding the collection and use of personal information.
Our business involvesthe storage and transmission of users’ proprietary information, and security breaches could expose us to a risk of loss ormisuse of this information, litigation, and potential liability. An increasing number of websites, including several other Internetcompanies, have recently disclosed breaches of their security, some of which have involved sophisticated and highly targeted attackson portions of their sites. Because the techniques used to obtain unauthorized access, disable or degrade service, or sabotagesystems, change frequently and often are not recognized until launched against a target, we may be unable to anticipate these techniquesor to implement adequate preventative measures. If an actual or perceived breach of our security occurs, the market perceptionof the effectiveness of our security measures could be harmed and we could lose users. A party that is able to circumvent our securitymeasures could misappropriate magicJack’s or its users’ proprietary information, cause interruption in our operations,damage our computers or those of our users, or otherwise damage our reputation and business. Any compromise of our security couldresult in a violation of applicable privacy and other laws, significant legal and financial exposure, damage to our reputation,and a loss of confidence in our security measures, which could harm our business.
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Currently, a significantnumber of our users authorize it to bill their credit card accounts directly for all transaction fees charged by us. We rely onencryption and authentication technology licensed from third parties to provide the security and authentication to effectivelysecure transmission of confidential information, including customer credit card numbers. Advances in computer capabilities, newdiscoveries in the field of cryptography or other developments may result in the technology used by us to protect transaction databeing breached or compromised. Non-technical means, for example, actions by a suborned employee, can also result in a data breach.
Possession and use ofpersonal information in conducting our business subjects it to legislative and regulatory burdens that could require notificationof data breach, restrict our use of personal information and hinder our ability to acquire new customers or market to existingcustomers. We may incur expenses to comply with privacy and security standards and protocols imposed by law, regulation, industrystandards or contractual obligations.
Under payment card rulesand magicJack’s contracts with its card processors, if there is a breach of payment card information that we store, we couldbe liable to the payment card issuing banks for their cost of issuing new cards and related expenses. In addition, if we fail tofollow payment card industry security standards, even if there is no compromise of customer information, we could incur significantfines or lose our ability to give customers the option of using payment cards to fund their payments or pay their fees. If we wereunable to accept payment cards, our business would be seriously damaged.
Our servers are alsovulnerable to computer viruses, physical or electronic break-ins, and similar disruptions. We may need to expend significant resourcesto protect against security breaches or to address problems caused by breaches. These issues are likely to become more difficultas we expand the number of places where we operate. Security breaches, including any breach by us or by parties with which we havecommercial relationships that result in the unauthorized release of magicJack’s users’ personal information, coulddamage our reputation and expose us to a risk of loss or litigation and liability. Our insurance policies carry coverage limitsthat may not be adequate to reimburse it for losses caused by security breaches.
magicJack’s users,as well as those of other prominent Internet companies, have been and will continue to be targeted by parties using fraudulent“spoof” and “phishing” emails to misappropriate passwords, credit card numbers, or other personal informationor to introduce viruses or other malware through “trojan horse” programs to magicJack’s users’ computers.These emails appear to be legitimate emails sent by magicJack, but direct recipients to fake websites operated by the sender ofthe email or request that the recipient send a password or other confidential information via email or download a program. Despiteour efforts to mitigate “spoof” and “phishing” emails through product improvements and user education,“spoof” and “phishing” remain a serious problem that may damage our brands, discourage use of our websites,and increase our costs.
We have a stringentprivacy policy covering the information we collect from our customers and have established security features to protect this information.However, our security measures may not prevent security breaches. We may need to expend resources to protect against security breachesor to address problems caused by breaches. If unauthorized third parties were able to penetrate our security and gain access to,or otherwise misappropriate, our customers’ personal information or be able to access their telephone calls, it could harmour reputation and, therefore, our business and magicJack could be subject to liability. Such liability could include claims formisuse of personal information or unauthorized use of credit cards. These claims could result in litigation, our involvement inwhich, regardless of the outcome, could require us to expend significant financial resources. Internet privacy is a rapidly changingarea and we may be subject to future requirements and legislation that are costly to implement and negatively impact our results.
magicJack hasoperations located in Israel, and therefore our results may be adversely affected by political, economic and military conditionsin Israel.
magicJack’s businessand operations may be directly influenced by the political, economic and military conditions affecting Israel at any given time.A change in the security and political situation in Israel could have a material adverse effect on our business, operating resultsand financial condition. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place betweenIsrael and its Arab neighbors, including Hezbollah in Lebanon and Hamas in the Gaza Strip. In the last few years, these conflictsinvolved missile strikes against civilian targets in various parts of Israel and negatively affected business conditions in Israel.In addition, political uprisings and conflicts in various countries in the Middle East, including Syria and Iraq, and includingterrorist organizations gaining control and political power in the region such as the Islamic State of Iraq and Syria, or ISIS,are affecting the political stability of those countries. It is not clear how this instability will develop and how it will affectthe political and security situation in the Middle East.
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Our commercial insurancedoes not cover losses that may occur as a result of events associated with the security situation in the Middle East. Althoughthe Israeli government currently covers the reinstatement value of direct damages that are caused by terrorist attacks or actsof war, we cannot assure you that this government coverage will be maintained. Any losses or damages incurred by us could havea material adverse effect on our business, operating results and financial condition.
Furthermore, severalcountries, principally in the Middle East, restrict doing business with Israel and Israeli companies, and additional countriesmay impose restrictions on doing business with Israel and Israeli companies if hostilities in the region continue or intensify.Any hostilities involving Israel or the interruption or curtailment of trade between Israel and its present trading partners couldhave a material adverse effect on our business, operating results and financial condition.
Risks Related to Our Brand Portfolio
The failure ofour licensees to sell products that generate royalties to us, to pay us royalties pursuant to their license agreements with us,or to renew these agreements could negatively affect our results of operations and financial condition.
Our revenues are dependenton royalty payments made to us under our license agreements. Although some of our license agreements guarantee a minimum royaltypayment to us each year, the failure of our licensees to satisfy these or the other obligations under their agreements with us,their decision to not renew their agreements with us or their inability to grow or maintain their sales of products bearing ourbrands or their businesses generally could cause our revenues to decline. These events or circumstances could occur for a varietyof reasons, many of which are outside our control, including business and operational risks that impact our licensees’ abilityto make payments and sell products generally, such as obtaining and maintaining desirable store locations and consumer acceptanceand presence; retaining key personnel, including the specific individuals who work on sales and marketing for products bearingour brands; and liquidity and capital resources risks.
The consumer goods and services sectorhas been severely impacted by the ongoing COVID-19 pandemic, which has resulted in mandatory store closures of uncertain durationdue to social distancing measures imposed to control the pandemic and our licensees may have difficulty selling their merchandiseand meeting their financial obligations to us.
The failure by any ofour key licensees or the concurrent failure by several licensees to meet their financial obligations to us or to renew their respectivelicense agreements with us could materially and adversely impact our results of operations and our financial condition.
Our brand investmentportfolio is subject to intense competition.
Wehold a majority interest in a brand investment portfolio that is focused on generating revenue through the licensing of trademarks.Therefore, our degree of success is dependent on the strength of our brands, consumer acceptance of our brands and our licensees’ability to design, manufacture and sell products bearing our brands, all of which is dependent on the ability of us and our licenseesresponding to ever-changing consumer demands. We cannot control the level of consumer acceptance of our brands and changing preferencesand trends may lead customers to purchase other products. Further, we cannot control the level of resources that our licenseescommit to supporting our brands, and our licensees may choose to support products bearing other brands to the detriment of ourbrands because our agreements generally do not prevent them from licensing or selling other products, including products bearingcompeting brands.
Inaddition, we compete with companies that own other brands and trademarks, as these companies could enter into similar licensingarrangements with retailers and wholesalers in the United States and internationally. These arrangements could be with our existingretail and wholesale partners, thereby competing with us for consumer attention and limited floor or rack space in the same storesin which our branded products are sold, and vying with us for the time and resources of the retailers and wholesale licensees thatmanufacture and distribute our products. These companies may be able to respond more quickly to changes in retailer, wholesalerand consumer preferences and devote greater resources to brand acquisition, development and marketing. We may not be able to competeeffectively against these companies.
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Ifwe or our brands are unable to compete successfully against current and future competitors, we may be unable to sustain or increasedemand for products bearing our brands, which could have a material adverse effect on our reputation, prospects, performance andfinancial condition.
Risks Related to Competition
We operate inhighly competitive industries. Some of our competitors may have certain competitive advantages, which may cause us to be unableto effectively compete with or gain market share from our competitors.
We face competitionwith respect to all of our service areas. The level of competition depends on the particular service area and, in the case of ourasset and liquidation services, the category of assets being liquidated or appraised. We compete with other companies and investmentbanks to help clients with their corporate finance and capital needs. In addition, we compete with companies and online servicesin the bidding for assets and inventory to be liquidated. The demand for online solutions continues to grow and our online competitorsinclude other e-commerce providers, auction websites such as eBay, as well as government agencies and traditional liquidators andauctioneers that have created websites to further enhance their product offerings and more efficiently liquidate assets. We expectthe market to become even more competitive as the demand for such services continues to increase and traditional and online liquidatorsand auctioneers continue to develop online and offline services for disposition, redeployment and remarketing of wholesale surplusand salvage assets. In addition, manufacturers, retailers and government agencies may decide to create their own websites to selltheir own surplus assets and inventory and those of third parties.
We also compete withother providers of valuation and advisory services. Competitive pressures within the Financial Consulting and other Advisory Servicesand real estate services markets, including a decrease in the number of engagements and/or a decrease in the fees which can becharged for these services, could affect revenues from our Financial Consulting and other Advisory Services and real estate servicesas well as our ability to engage new or repeat clients. We believe that given the relatively low barriers to entry in the FinancialConsulting and other Advisory Services and real estate services markets, these markets may become more competitive as the demandfor such services increases.
Some of our competitorsmay be able to devote greater financial resources to marketing and promotional campaigns, secure merchandise from sellers on morefavorable terms, adopt more aggressive pricing or inventory availability policies and devote more resources to website and systemsdevelopment than we are able to do. Any inability on our part to effectively compete could have a material adverse effect on ourfinancial condition, growth potential and results of operations.
We compete with specializedinvestment banks to provide financial and investment banking services to small and middle-market companies. Middle-market investmentbanks provide access to capital and strategic advice to small and middle-market companies in our target industries. We competewith those investment banks on the basis of a number of factors, including client relationships, reputation, the abilities of ourprofessionals, transaction execution, innovation, price, market focus and the relative quality of our products and services. Wehave experienced intense competition over obtaining advisory mandates in recent years, and we may experience pricing pressuresin our investment banking business in the future as some of our competitors seek to obtain increased market share by reducing fees.Competition in the middle-market may further intensify if larger Wall Street investment banks expand their focus to this sectorof the market. Increased competition could reduce our market share from investment banking services and our ability to generatefees at historical levels.
We also face increasedcompetition due to a trend toward consolidation. In recent years, there has been substantial consolidation and convergence amongcompanies in the financial services industry. This trend was amplified in connection with the unprecedented disruption and volatilityin the financial markets during the past several years, and, as a result, a number of financial services companies have merged,been acquired or have fundamentally changed their respective business models. Many of these firms may have the ability to supportinvestment banking, including financial advisory services, with commercial banking, insurance and other financial services in aneffort to gain market share, which could result in pricing pressure in our businesses.
UOL competes with numerousproviders of broadband, mobile broadband and DSL services, as well as other dial-up Internet access providers, many of whom arelarge and have significantly more financial and marketing resources. The principal competitors for UOL’s mobile broadbandand DSL services include, among others, local exchange carriers, wireless and satellite service providers, and cable service providers.
magicJack competes withthe traditional telephone service providers, which provide telephone service using the public switched telephone network. Certainof these traditional providers have also added, or are planning to add, broadband telephone services to their existing telephoneand broadband offerings. We also face, or expect to face, competition from cable companies, which offer broadband telephone servicesto their existing cable television and broadband offerings. Further, wireless providers offer services that some customers mayprefer over wireline-based service. In the future, as wireless companies offer more minutes at lower prices, their services maybecome more attractive to customers as a replacement for broadband or wireline-based phone service. We face competition on magicJackdevice sales from manufacturers of smart phones, tablets and other handheld wireless devices. Also, we compete against establishedalternative voice communication providers, and may face competition from other large, well-capitalized Internet companies. In addition,we compete with independent broadband telephone service providers.
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Our brand investmentportfolio competes with companies that own other brands and trademarks, as these companies could enter into similar licensing arrangementswith retailers and wholesalers in the United States and internationally. These arrangements could be with our existing retail andwholesale partners, thereby competing with us for consumer attention and limited floor or rack space in the same stores in whichour branded products are sold, and vying with us for the time and resources of the retailers and wholesale licensees that manufactureand distribute our products. These companies may be able to respond more quickly to changes in retailer, wholesaler and consumerpreferences and devote greater resources to brand acquisition, development and marketing.
If we are unableto attract and retain qualified personnel, we may not be able to compete successfully in our industry.
Our future success dependsto a significant degree upon the continued contributions of senior management and the ability to attract and retain other highlyqualified management personnel. We face competition for management from other companies and organizations; therefore, we may notbe able to retain our existing personnel or fill new positions or vacancies created by expansion or turnover at existing compensationlevels. Although we have entered into employment agreements with key members of the senior management team, there can be no assurancessuch key individuals will remain with us. The loss of any of our executive officers or other key management personnel would disruptour operations and divert the time and attention of our remaining officers and management personnel which could have an adverseeffect on our results of operations and potential for growth.
We also face competitionfor highly skilled employees with experience in our industry, which requires a unique knowledge base. We may be unable to recruitor retain other existing technical, sales and client support personnel that are critical to our ability to execute our businessplan. Additionally, the ongoing COVID-19 pandemic could affect the availability of our key personnel.
Risks Related to Data Security
Security breachesand other disruptions could compromise our information and expose us to liability, which would cause our business and reputationto suffer.
In the ordinary courseof our business, we collect and store sensitive data, including intellectual property, our proprietary business information andthat of our customers, clients and business partners, and personally identifiable information of our employees, in our serversand on our networks. The secure processing, maintenance and transmission of this information is critical to our operations andbusiness strategy. Despite our security measures, our information technology and infrastructure may be vulnerable to attacks byhackers or breached due to employee error, malfeasance or other disruptions. Any such breach could compromise our networks andthe information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss ofinformation could result in legal claims or proceedings, liability under laws that protect the privacy of personal information,and regulatory penalties. In addition, such a breach could disrupt our operations and the services we provide to our clients, damageour reputation, and cause a loss of confidence in our services, which could adversely affect our business and our financial condition.
Significant disruptionsof information technology systems, breaches of data security, or unauthorized disclosures of sensitive data or personally identifiableinformation could adversely affect our business, and could subject us to liability or reputational damage.
Our business is increasinglydependent on critical, complex, and interdependent information technology (“IT”) systems, including Internet-basedsystems, some of which are managed or hosted by third parties, to support business processes as well as internal and external communications.The size and complexity of our IT systems make us vulnerable to, and we have experienced, IT system breakdowns, malicious intrusion,and computer viruses, which may result in the impairment of our ability to operate our business effectively.
In addition, our systemsand the systems of our third-party providers and collaborators are potentially vulnerable to data security breaches which may exposesensitive data to unauthorized persons or to the public. Such data security breaches could lead to the loss of confidential information,trade secrets or other intellectual property, or could lead to the public exposure of personal information (including personallyidentifiable information) of our employees, customers, business partners, and others. In addition, the increased use of socialmedia by our employees and contractors could result in inadvertent disclosure of sensitive data or personal information, includingbut not limited to, confidential information, trade secrets and other intellectual property.
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Any such disruptionor security breach, as well as any action by us or our employees or contractors that might be inconsistent with the rapidly evolvingdata privacy and security laws and regulations applicable within the United States and elsewhere where we conduct business, couldresult in enforcement actions by U.S. states, the U.S. Federal government or foreign governments, liability or sanctions underdata privacy laws that protect personally identifiable information, regulatory penalties, other legal proceedings such as but notlimited to private litigation, the incurrence of significant remediation costs, disruptions to our development programs, businessoperations and collaborations, diversion of management efforts and damage to our reputation, which could harm our business andoperations. Because of the rapidly moving nature of technology and the increasing sophistication of cybersecurity threats, ourmeasures to prevent, respond to and minimize such risks may be unsuccessful.
In addition, the EuropeanParliament and the Council of the European Union adopted a comprehensive general data privacy regulation (“GDPR”) in2016 that took effect in May 2018 and governs the collection and use of personal data in the European Union. The GDPR, which iswide-ranging in scope, will impose several requirements relating to the consent of the individuals to whom the personal data relates,the information provided to the individuals, the security and confidentiality of the personal data, data breach notification andthe use of third party processors in connection with the processing of the personal data. The GDPR also imposes strict rules onthe transfer of personal data out of the European Union to the United States, enhances enforcement authority and imposes largepenalties for noncompliance, including the potential for fines of up to €20 million or 4% of the annual global revenues ofthe infringer, whichever is greater. In addition, the California Consumer Privacy Act effective on January 1, 2020 and appliesto for-profit businesses that conduct business in California and meet certain revenue or data collection thresholds. The CCPA willgive consumers the right to request disclosure of information collected about them, and whether that information has been soldor shared with others, the right to request deletion of personal information (subject to certain exceptions), the right to optout of the sale of the consumer’s personal information, and the right not to be discriminated against for exercising theserights. In October 2019, the California Attorney General adopted regulations to implement the CCPA. In addition, similar laws haveand may be adopted by other states where the Company does business. The impact of the CCPA and other state privacy laws on theCompany’s business is yet to be determined.
Due to the ongoing COVID-19pandemic, most of our personnel have shifted to working remotely and we cannot predict the duration of this shift. While we havemade substantial investments on our information security infrastructure, this shift has could put stress on our information securityinfrastructure and increase the risk of a data breach.
RisksRelated to our Securities and Ownership
Anti-takeoverprovisions under our charter documents and Delaware law could delay or prevent a change of control and could also limit the marketprice of our stock.
Our amended and restatedcertificate of incorporation and our bylaws, as amended, contain provisions that could delay or prevent a change of control ofour company or changes in our board of directors that our stockholders might consider favorable. Our amended and restated certificateof incorporation provides that our board of directors will be authorized to issue from time to time, without further stockholderapproval, up to 1,000,000 shares of preferred stock in one or more series and to fix or alter the designations, preferences, rightsand any qualifications, limitations or restrictions of the shares of each series, including the dividend rights, dividend rates,conversion rights, voting rights, rights of redemption, including sinking fund provisions, redemption price or prices, liquidationpreferences and the number of shares constituting any series or designations of any series. Such shares of preferred stock couldhave preferences over our common stock with respect to dividends and liquidation rights. We may issue additional preferred stockin ways which may delay, defer or prevent a change of control of our company without further action by our stockholders. Such sharesof preferred stock may be issued with voting rights that may adversely affect the voting power of the holders of our common stockby increasing the number of outstanding shares having voting rights, and by the creation of class or series voting rights.
We are also governedby the provisions of Section 203 of the Delaware General Corporate Law, which may prohibit certain business combinations with stockholdersowning 15% or more of our outstanding voting stock. The foregoing and other provisions in our amended and restated certificateof incorporation, our bylaws, as amended, and Delaware law could make it more difficult for stockholders or potential acquirersto obtain control of our board of directors or initiate actions that are opposed by the then-current board of directors, includingdelaying or impeding a merger, tender offer, or proxy contest or other change of control transaction involving our company. Anydelay or prevention of a change of control transaction or changes in our board of directors could prevent the consummation of atransaction in which our stockholders could receive a substantial premium over the then current market price for their shares.
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Because of theirsignificant stock ownership, some of our existing stockholders will be able to exert control over us and our significant corporatedecisions.
Our executive officers,directors and their affiliates own or control, in the aggregate, approximately 27.5% of our outstanding common stock as of December31, 2020. In particular, our Chairman and Co-Chief Executive Officer, Bryant R. Riley, owns or controls, in the aggregate, 5,383,368shares of our common stock or 20.9% of our outstanding common stock as of December 31, 2020. These stockholders are able to exerciseinfluence over matters requiring stockholder approval, such as the election of directors and the approval of significant corporatetransactions, including transactions involving an actual or potential change of control of the company or other transactions thatnon-controlling stockholders may not deem to be in their best interests. This concentration of ownership may harm the market priceof our common stock by, among other things:
| ● | delaying, deferring, or preventing a change in control of our company; |
| ● | impeding a merger, consolidation, takeover, or other business combination involving our company; |
| ● | causing us to enter into transactions or agreements that are not in the best interests of all stockholders; or |
| ● | discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of our company. |
Our common stockprice may fluctuate substantially, and your investment could suffer a decline in value.
The market price ofour common stock may be volatile and could fluctuate substantially due to many factors, including, among other things:
| ● | actual or anticipated fluctuations in our results of operations; |
| ● | announcements of significant contracts and transactions by us or our competitors; |
| ● | sale of common stock or other securities in the future; |
| ● | the trading volume of our common stock; |
| ● | changes in our pricing policies or the pricing policies of our competitors; and |
| ● | general economic conditions |
In addition, the stockmarket in general has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to theoperating performance of those companies. These broad market factors may materially harm the market price of our common stock,regardless of our operating performance.
The trading priceof our common shares is subject to volatility.
On November 16, 2016,we began trading our shares on the NASDAQ Global Market. Trading of our common stock has in the past been highly volatile and themarket price of shares of our common stock could continue to fluctuate substantially. Additionally, if we are not able to maintainour listing on NASDAQ, then our common stock will again be quoted for trading on an over-the-counter quotation system and may besubject to more significant fluctuations in stock price and trading volume and large bid and ask price spreads.
We may not paydividends regularly or at all in the future.
From time to time,we may decide to pay dividends which will be dependent upon our financial condition and results of operations. Our Board of Directorsmay reduce or discontinue dividends at any time for any reason it deems relevant and there can be no assurances that we will continueto generate sufficient cash to pay dividends, or that we will continue to pay dividends with the cash that we do generate. Thedetermination regarding the payment of dividends is subject to the discretion of our Board of Directors, and there can be no assurancesthat we will continue to generate sufficient cash to pay dividends, or that we will pay dividends in future periods.
Our level of indebtedness,and restrictions under such indebtedness, could adversely affect our operations and liquidity.
Our senior notes include:(a) the 6.875% 2023 Notes with an aggregate principal amount of approximately $115.2 million; (b) the 7.375% 2023 Notes with anaggregate principal amount of approximately $137.5 million, (c) the 7.25% 2027 Notes with an aggregate principal amount of $122.8million; (d) the 7.50% 2027 Notes with an aggregate principal amount of $128.2 million; (e) the 6.75% 2024 Notes with an aggregateprincipal amount of approximately $111.2 million; (f) the 6.50% 2026 Notes with an aggregate principal amount of approximately$134.7 million; (g) the 6.375% 2025 Notes with an aggregate principal amount of approximately $130.9 million and (h) the 6.00%2028 Notes with an aggregate principal amount of approximately $230.0 million. The Company periodically enters into At Market IssuanceSales Agreements with B. Riley Securities. Most recently, the Company entered into the February 2020 Sales Agreement on February14, 2020. The most recent sales agreement prospectus was filed by us with the SEC on January 28, 2021 (the “January 2021Sales Agreement Prospectus”). Pursuant to the February 2020 Sales Agreement, the Company may sell from time to time, at theCompany’s option, up to the aggregate principal amount of $150,000,000 of the 7.50% 2027 Notes, 7.25% 2027 Notes, 7.375%2023 Notes, 6.875% 2023 Notes, 6.75% 2024 Notes, 6.50% 2026 Notes, 6.375% 2025 Notes and Depositary Shares. At December 31, 2020,the Company had $132,697 million available for offer and sale pursuant to the February 2020 Sales Agreement.
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On December 19, 2018,BRPI Acquisition Co LLC (“BRPAC”), a Delaware limited liability company, UOL, and YMAX Corporation, a Delaware corporation(collectively, the “Borrowers”), indirect wholly owned subsidiaries of ours, in the capacity of borrowers, enteredinto a credit agreement with the Banc of California, N.A. in the capacity as agent and lender and with the other lenders partythereto (the “BRPAC Credit Agreement”). Under the BRPAC Credit Agreement, we borrowed $80.0 million due December 19,2023. Pursuant to the terms of the BRPAC Credit Agreement, we may request additional optional term loans in an aggregate principalamount of up to $10.0 million at any time prior to the first anniversary of the agreement date. On February 1, 2019, the Borrowersentered into the First Amendment to Credit Agreement and Joinder with City National Bank as a new lender in which the new lenderextended to Borrowers the additional $10.0 million as further discussed in Note 9 to the accompanying financial statements. OnDecember 31, 2020, the Borrowers entered into the Second Amendment to Credit Agreement pursuant to which, among other things, weborrowed an additional $75.0 million term loan, the proceeds of which the Borrowers’ will use to repay the outstanding principalamount of the existing term loans and optional loans and for other general corporate purposes. In April 2017, we amended our CreditAgreement with Wells Fargo Bank (the “Wells Fargo Credit Agreement”) to increase our retail liquidation line of creditfrom $100 million to $200 million.
The terms of such indebtednesscontain various restrictions and covenants regarding the operation of our business, including, but not limited to, restrictionson our ability to merge or consolidate with or into any other entity. We may also secure additional debt financing in the futurein addition to our current debt. Our level of indebtedness generally could adversely affect our operations and liquidity, by, amongother things: (i) making it more difficult for us to pay or refinance our debts as they become due during adverse economic andindustry conditions because we may not have sufficient cash flows to make our scheduled debt payments; (ii) causing us to use alarger portion of our cash flows to fund interest and principal payments, thereby reducing the availability of cash to fund workingcapital, capital expenditures and other business activities; (iii) making it more difficult for us to take advantage of significantbusiness opportunities, such as acquisition opportunities or other strategic transactions, and to react to changes in market orindustry conditions; and (iv) limiting our ability to borrow additional monies in the future to fund working capital, capital expenditures,acquisitions and other general corporate purposes as and when needed, which could force us to suspend, delay or curtail businessprospects, strategies or operations.
We may not be able togenerate sufficient cash flow to pay the interest on our debt, and future working capital, borrowings or equity financing may notbe available to pay or refinance such debt. If we are unable to generate sufficient cash flow to pay the interest on our debt,we may have to delay or curtail our operations. If we are unable to service our indebtedness, we will be forced to adopt an alternativestrategy that may include actions such as reducing capital expenditures, selling assets, restructuring or refinancing our indebtednessor seeking additional equity capital. These alternative strategies may not be affected on satisfactory terms, if at all, and theymay not yield sufficient funds to make required payments on our indebtedness. If, for any reason, we are unable to meet our debtservice and repayment obligations, we would be in default under the terms of the agreements governing our debt, which could allowour creditors at that time to declare certain outstanding indebtedness to be due and payable or exercise other available remedies,which may in turn trigger cross acceleration or cross default rights in other agreements. If that should occur, we may not be ableto pay all such debt or to borrow sufficient funds to refinance it. Even if new financing were then available, it may not be onterms that are acceptable to us.
Our senior notesare unsecured and therefore are effectively subordinated to any secured indebtedness that we currently have or that we may incurin the future.
Our senior notes arenot secured by any of our assets or any of the assets of our subsidiaries. As a result, our senior notes are effectively subordinatedto any secured indebtedness that we or our subsidiaries have currently outstanding or may incur in the future (or any indebtednessthat is initially unsecured to which we subsequently grant security) to the extent of the value of the assets securing such indebtedness.The indenture governing our senior notes does not prohibit us or our subsidiaries from incurring additional secured (or unsecured)indebtedness in the future. In any liquidation, dissolution, bankruptcy or other similar proceeding, the holders of any of ourexisting or future secured indebtedness and the secured indebtedness of our subsidiaries may assert rights against the assets pledgedto secure that indebtedness and may consequently receive payment from these assets before they may be used to pay other creditors,including the holders of our senior notes.
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Our senior notesare structurally subordinated to the indebtedness and other liabilities of our subsidiaries.
Our senior notes areobligations exclusively of the Company and not of any of our subsidiaries. None of our subsidiaries is a guarantor of our seniornotes, and our senior notes are not required to be guaranteed by any subsidiaries we may acquire or create in the future. Therefore,in any bankruptcy, liquidation or similar proceeding, all claims of creditors (including trade creditors) of our subsidiaries willhave priority over our equity interests in such subsidiaries (and therefore the claims of our creditors, including holders of oursenior notes) with respect to the assets of such subsidiaries. Even if we are recognized as a creditor of one or more of our subsidiaries,our claims would still be effectively subordinated to any security interests in the assets of any such subsidiary and to any indebtednessor other liabilities of any such subsidiary senior to our claims. Consequently, our senior notes will be structurally subordinatedto all indebtedness and other liabilities (including trade payables) of any of our subsidiaries and any subsidiaries that we mayin the future acquire or establish as financing vehicles or otherwise. The indenture governing our senior notes does not prohibitus or our subsidiaries from incurring additional indebtedness in the future. In addition, future debt and security agreements enteredinto by our subsidiaries may contain various restrictions, including restrictions on payments by our subsidiaries to us and thetransfer by our subsidiaries of assets pledged as collateral.
The indentureunder which our senior notes were issued contains limited protection for holders of our senior notes.
The indenture underwhich our senior notes were issued offers limited protection to holders of our senior notes. The terms of the indenture and oursenior notes do not restrict our or any of our subsidiaries’ ability to engage in, or otherwise be a party to, a varietyof corporate transactions, circumstances or events that could have an adverse impact on the holders of our senior notes. In particular,the terms of the indenture and our senior notes do not place any restrictions on our or our subsidiaries’ ability to:
| ● | issue debt securities or otherwise incur additional indebtedness or other obligations, including (1) any indebtedness or other obligations that would be equal in right of payment to our senior notes, (2) any indebtedness or other obligations that would be secured and therefore rank effectively senior in right of payment to our senior notes to the extent of the values of the assets securing such debt, (3) indebtedness of ours that is guaranteed by one or more of our subsidiaries and which therefore is structurally senior to our senior notes and (4) securities, indebtedness or obligations issued or incurred by our subsidiaries that would be senior to our equity interests in our subsidiaries and therefore rank structurally senior to our senior notes with respect to the assets of our subsidiaries; |
| ● | pay dividends on, or purchase or redeem or make any payments in respect of, capital stock or other securities subordinated in right of payment to our senior notes; |
| ● | sell assets (other than certain limited restrictions on our ability to consolidate, merge or sell all or substantially all of our assets); |
| ● | enter into transactions with affiliates; |
| ● | create liens (including liens on the shares of our subsidiaries) or enter into sale and leaseback transactions; |
| ● | make investments; or |
| ● | create restrictions on the payment of dividends or other amounts to us from our subsidiaries. |
In addition, the indenturedoes not include any protection against certain events, such as a change of control, a leveraged recapitalization or “goingprivate” transaction (which may result in a significant increase of our indebtedness levels), restructuring or similar transactions.Furthermore, the terms of the indenture and our senior notes do not protect holders of our senior notes in the event that we experiencechanges (including significant adverse changes) in our financial condition, results of operations or credit ratings, as they donot require that we or our subsidiaries adhere to any financial tests or ratios or specified levels of net worth, revenues, income,cash flow, or liquidity. Also, an event of default or acceleration under our other indebtedness would not necessarily result inan event of default under our senior notes.
Our ability to recapitalize,incur additional debt and take a number of other actions that are not limited by the terms of our senior notes may have importantconsequences for the holders of our senior notes, including making it more difficult for us to satisfy our obligations with respectto our senior notes or negatively affecting the trading value of our senior notes.
Other debt we issueor incur in the future could contain more protections for its holders than the indenture and our senior notes, including additionalcovenants and events of default. The issuance or incurrence of any such debt with incremental protections could affect the marketfor and trading levels and prices of our senior notes.
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An increase inmarket interest rates could result in a decrease in the value of our senior notes.
In general, as marketinterest rates rise, notes bearing interest at a fixed rate decline in value. Consequently, if the market interest rates increaseafter our senior notes were purchased, the market value of our senior notes may decline. We cannot predict the future level ofmarket interest rates.
An active tradingmarket for our senior notes may not develop, which could limit the market price of our senior notes or the ability of our seniornote holders to sell them.
The 7.25% 2027 Notesare quoted on Nasdaq under the symbol “RILYG,” the 7.50% 2027 Notes are quoted on Nasdaq under the symbol “RILYZ,”the 7.375% 2023 Notes are quoted on Nasdaq under the symbol “RILYH,” the 6.875% 2023 Notes are quoted on Nasdaq underthe symbol “RILYI,” the 6.75% 2024 Notes are quoted on Nasdaq under the symbol “RILYO,” the 6.50% 2026Notes are quoted on Nasdaq under the symbol “RILYN,” the 6.375% 2025 Notes are quoted on Nasdaq under the symbol “RILYM”and the 6.00% 2028 Notes are quoted on Nasdaq under the symbol “RILYT”. We cannot provide any assurances that an activetrading market will develop for our senior notes or that our senior note holders will be able to sell their senior notes. If thesenior notes are traded after their initial issuance, they may trade at a discount from their initial offering price dependingon prevailing interest rates, the market for similar securities, our credit ratings, general economic conditions, our financialcondition, performance and prospects and other factors. Accordingly, we cannot assure our senior note holders that a liquid tradingmarket will develop for our senior notes, that our senior note holders will be able to sell our senior notes at a particular timeor that the price our senior note holders receive when they sell will be favorable. To the extent an active trading market doesnot develop, the liquidity and trading price for our senior notes may be harmed. Accordingly, our senior note holders may be requiredto bear the financial risk of an investment in our senior notes for an indefinite period of time.
We may issue additionalnotes.
Under the terms of theindenture governing our senior notes, we may from time to time without notice to, or the consent of, the holders of our seniornotes, create and issue additional notes which will be equal in rank to our senior notes. We will not issue any such additionalnotes unless such issuance would constitute a “qualified reopening” for U.S. federal income tax purposes.
The rating forthe 7.25% 2027 Notes, 7.375% 2023 Notes, 6.875% 2023 Notes, 6.75% 2024 Notes, 6.50% 2026 Notes, 6.375% 2025 Notes or 6.00% 2028Notes could at any time be revised downward or withdrawn entirely at the discretion of the issuing rating agency.
We have obtained a ratingfor the 7.25% 2027 Notes, 7.375% 2023 Notes, 6.875% 2023 Notes, 2024 Notes, 2026 Notes, 2025 Notes and 2028 Notes (collectively,the “Rated Notes”). Ratings only reflect the views of the issuing rating agency or agencies and such ratings couldat any time be revised downward or withdrawn entirely at the discretion of the issuing rating agency. A rating is not a recommendationto purchase, sell or hold any of the Rated Notes. Ratings do not reflect market prices or suitability of a security for a particularinvestor and the rating of the Rated Notes may not reflect all risks related to us and our business, or the structure or marketvalue of the Rated Notes. We may elect to issue other securities for which we may seek to obtain a rating in the future. If weissue other securities with a rating, such ratings, if they are lower than market expectations or are subsequently lowered or withdrawn,could adversely affect the market for or the market value of the Rated Notes.
There is no establishedmarket for the Depositary Shares and the market value of the Depositary Shares could be substantially affected by various factors.
The Depositary Sharesare a new issue of securities with no established trading market. Although the shares recently began trading on the Nasdaq GlobalMarket, an active trading market on the Nasdaq Global Market for the Depositary Shares may not develop or last, in which case thetrading price of the Depositary Shares could be adversely affected. If an active trading market does develop on the Nasdaq GlobalMarket, the Depositary Shares may trade at prices higher or lower than their initial offering price. The trading price of the DepositaryShares also depends on many factors, including, but not limited to:
| ● | prevailing interest rates; |
| ● | the market for similar securities; |
| ● | general economic and financial market conditions; and |
| ● | the Company’s financial condition, results of operations and prospects. |
The Company has beenadvised by some of the underwriters that they intend to make a market in the Depositary Shares, but they are not obligated to doso and may discontinue market-making at any time without notice.
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The Existing PreferredStock and the Depositary Shares rank junior to all of the Company’s indebtedness and other liabilities and are effectivelyjunior to all indebtedness and other liabilities of the Company’s subsidiaries.
In the event of a bankruptcy,liquidation, dissolution or winding-up of the affairs of the Company, the Company’s assets will be available to pay obligationson the 6.875% Series A Cumulative Perpetual Preferred Stock, par value $0.0001 per share (the “Series A Preferred Stock”)and the 7.375% Series B Cumulative Perpetual Preferred Stock, par value $0.0001 per share (the “Series B Preferred Stock”and, together with the Series A Preferred Stock, the “Existing Preferred Stock”), which ranks in parity with the SeriesA Preferred Stock, only after all of the Company’s indebtedness and other liabilities have been paid. The rights of holdersof the Existing Preferred Stock to participate in the distribution of the Company’s assets will rank junior to the priorclaims of the Company’s current and future creditors and any future series or class of preferred stock the Company may issuethat ranks senior to the Existing Preferred Stock. In addition, the Existing Preferred Stock effectively ranks junior to all existingand future indebtedness and other liabilities of (as well as any preferred equity interests held by others in) the Company’sexisting subsidiaries and any future subsidiaries. The Company’s existing subsidiaries are, and any future subsidiaries wouldbe, separate legal entities and have no legal obligation to pay any amounts to the Company in respect of dividends due on the ExistingPreferred Stock. If the Company is forced to liquidate its assets to pay its creditors, the Company may not have sufficient assetsto pay amounts due on any or all of the Existing Preferred Stock then outstanding. The Company and its subsidiaries have incurredand may in the future incur substantial amounts of debt and other obligations that will rank senior to the Existing Preferred Stock.The Company may incur additional indebtedness and become more highly leveraged in the future, which could harm the Company’sfinancial position and potentially limit cash available to pay dividends. As a result, the Company may not have sufficient fundsremaining to satisfy its dividend obligations relating to the Existing Preferred Stock if the Company incurs additional indebtedness.
Future offerings ofdebt or senior equity securities may adversely affect the market price of the Depositary Shares. If the Company decides to issuedebt or senior equity securities in the future, it is possible that these securities will be governed by an indenture or otherinstrument containing covenants restricting the Company’s operating flexibility. Additionally, any convertible or exchangeablesecurities that the Company issues in the future may have rights, preferences and privileges more favorable than those of the ExistingPreferred Stock and may result in dilution to owners of the Depositary Shares. The Company and, indirectly, the Company’sshareholders, will bear the cost of issuing and servicing such securities. Because the Company’s decision to issue debt orequity securities in any future offering will depend on market conditions and other factors beyond the Company’s control,the Company cannot predict or estimate the amount, timing or nature of the Company’s future offerings. Thus, holders of theDepositary Shares will bear the risk of the Company’s future offerings reducing the market price of the Depositary Sharesand diluting the value of their holdings in the Company.
The Company mayissue additional shares of the Existing Preferred Stock and additional series of preferred stock that rank on a parity with theExisting Preferred Stock as to dividend rights, rights upon liquidation or voting rights.
The Company is allowedto issue additional shares of Existing Preferred Stock and additional series of preferred stock that would rank on a parity withthe Existing Preferred Stock as to dividend payments and rights upon the Company’s liquidation, dissolution or winding upof the Company’s affairs pursuant to the Company’s articles of incorporation and the certificate of designation forthe Existing Preferred Stock without any vote of the holders of the Existing Preferred Stock. The Company’s articles of incorporationauthorize the Company to issue up to 1,000,000 shares of preferred stock in one or more series on terms determined by the Company’sBoard of Directors. Prior to the issuance of Series A Preferred Stock, the Company had no outstanding series of preferred stock.However, the use of depositary shares enables the Company to issue significant amounts of preferred stock, notwithstanding thenumber of shares authorized by the Company’s articles of incorporation. The issuance of additional shares of Existing PreferredStock and additional series of parity preferred stock could have the effect of reducing the amounts available to the Existing Preferredstockholders upon the Company’s liquidation or dissolution or the winding up of the Company’s affairs. It also mayreduce dividend payments on the Existing Preferred Stock issued and outstanding if the Company does not have sufficient funds topay dividends on all Existing Preferred Stock outstanding and other classes of stock with equal priority with respect to dividends.
In addition, althoughholders of the Depositary Shares are entitled to limited voting rights (discussed further below), the holders of the DepositaryShares will vote separately as a class along with all other outstanding series of the Company’s preferred stock that theCompany may issue upon which like voting rights have been conferred and are exercisable. As a result, the voting rights of holdersof the Depositary Shares may be significantly diluted, and the holders of such other series of preferred stock that the Companymay issue may be able to control or significantly influence the outcome of any vote.
Future issuances andsales of parity preferred stock, or the perception that such issuances and sales could occur, may cause prevailing market pricesfor the Depositary Shares and the Company’s common stock to decline and may adversely affect the Company’s abilityto raise additional capital in the financial markets at times and prices favorable to the Company. Such issuances may also reduceor eliminate the Company’s ability to pay dividends on the Company’s common stock.
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Holders of DepositaryShares will have extremely limited voting rights.
The voting rights ofholders of Depositary Shares will be limited. The Company’s common stock is the only class of the Company’s securitiesthat carries full voting rights. Voting rights for holders of Depositary Shares will exist primarily with respect to the abilityto elect (together with the holders of other outstanding series of the Company’s preferred stock, or Depositary Shares representinginterests in the Company’s preferred stock, or additional series of preferred stock the Company may issue in the future andupon which similar voting rights have been or are in the future conferred and are exercisable) two additional directors to theCompany’s Board of Directors in the event that six quarterly dividends (whether or not declared or consecutive) payable onthe Existing Preferred Stock are in arrears, and with respect to voting on amendments to the Company’s articles of incorporationor certificate of designation (in some cases voting together with the holders of other outstanding series of the Company’spreferred stock as a single class) that materially and adversely affect the rights of the holders of Depositary Shares (and otherseries of preferred stock, as applicable) or create additional classes or series of the Company’s stock that are senior tothe Existing Preferred Stock, provided that in any event adequate provision for redemption has not been made. Other than the limitedcircumstances described in this prospectus supplement, holders of Depositary Shares will not have any voting rights.
The DepositaryShares have not been rated.
The Existing PreferredStock and the Depositary Shares have not been rated and may never be rated. It is possible, however, that one or more rating agenciesmight independently decide to assign a rating to the Depositary Shares or that the Company may elect to obtain a rating of theDepositary Shares in the future. Furthermore, the Company may elect to issue other securities for which the Company may seek toobtain a rating. If any ratings are assigned to the Depositary Shares in the future or if the Company issues other securities witha rating, such ratings, if they are lower than market expectations or are subsequently lowered or withdrawn, could adversely affectthe market for, or the market value of, the Depositary Shares.
Ratings reflect theviews of the issuing rating agency or agencies, and such ratings could at any time be revised downward, placed on negative outlookor withdrawn entirely at the discretion of the issuing rating agency or agencies. Furthermore, a rating is not a recommendationto purchase, sell or hold any particular security, including the Depositary Shares. Ratings do not reflect market prices or thesuitability of a security for a particular investor, and any future rating of the Depositary Shares may not reflect all risks relatedto the Company and its business, or the structure or market value of the Depositary Shares.
The conversionfeature may not adequately compensate the holders, and the conversion and redemption features of the Existing Preferred Stock andthe Depositary Shares may make it more difficult for a party to take over the Company and may discourage a party from taking overthe Company.
Upon the occurrenceof a Delisting Event or Change of Control (each as defined in the certificate of designation for each series of the Existing PreferredStock, respectively), holders of the Depositary Shares will have the right (unless, prior to the Delisting Event Conversion Dateor Change of Control Conversion Date (each as defined in the certificate of designation for each series of the Existing PreferredStock, respectively), as applicable, the Company has provided or provide notice of the Company’s election to redeem suchseries of Existing Preferred Stock) to direct the depositary to convert some or all of such series of Existing Preferred Stockunderlying their Depositary Shares into the Company’s common stock (or equivalent value of alternative consideration), andunder these circumstances the Company will also have a special optional redemption right to redeem such series of Existing PreferredStock. Upon such a conversion, the holders will be limited to a maximum number of shares of the Company’s common stock equalto the Share Cap (as defined in the certificate of designation for each series of the Existing Preferred Stock, respectively) multipliedby the number of shares of such series of Existing Preferred Stock converted. If the Common Stock Price is less than $11.49 inthe case of the Series A Preferred Stock (which is approximately 50% of the closing sale price per share of the Company’scommon stock on October 1, 2019) or $13.39 in the case of the Series B Preferred Stock (which is approximately 50% of the closingsale price per share of the Company’s common stock on August 31, 2020), subject to adjustment, the holders will receive amaximum number of shares of the Company’s common stock per depositary share, which may result in a holder receiving valuethat is less than the liquidation preference of the Depositary Shares. In addition, those features of the Existing Preferred Stockand Depositary Shares may have the effect of inhibiting a third party from making an acquisition proposal for the Company or ofdelaying, deferring or preventing a change of control of the Company under circumstances that otherwise could provide the holdersof the Company’s common stock and Depositary Shares with the opportunity to realize a premium over the then-current marketprice or that shareholders may otherwise believe is in their best interests.
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The market priceof the Depositary Shares could be substantially affected by various factors.
The market price ofthe Depositary Shares will depend on many factors, which may change from time to time, including:
| ● | prevailing interest rates, increases in which may have an adverse effect on the market price of the Depositary Shares; |
| ● | the annual yield from distributions on the Depositary Shares as compared to yields on other financial instruments; |
| ● | general economic and financial market conditions; |
| ● | government action or regulation; |
| ● | the financial condition, performance and prospects of the Company and its competitors; |
| ● | changes in financial estimates or recommendations by securities analysts with respect to the Company, its competitors or the industry in which the Company operates; |
| ● | the Company’s issuance of additional preferred equity or debt securities; and |
| ● | actual or anticipated variations in quarterly operating results of the Company and its competitors. |
As a result of these and other factors, investorswho purchase the Depositary Shares may experience a decrease, which could be substantial and rapid, in the market price of theDepositary Shares, including decreases unrelated to the Company’s operating performance or prospects.
Item 1B. UNRESOLVED STAFF COMMENTS
None.
Item 2. PROPERTIES
Our headquarters arelocated in Los Angeles, California in a leased facility. We believe that our existing facilities are suitable and adequate forthe business conducted therein, appropriately used and have sufficient capacity for their intended purpose.
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Item 3. LEGAL PROCEEDINGS
The Company is subjectto certain legal and other claims that arise in the ordinary course of its business. In particular, the Company and its subsidiariesare named in and subject to various proceedings and claims arising primarily from our securities business activities, includinglawsuits, arbitration claims, class actions, and regulatory matters. Some of these claims seek substantial compensatory, punitive,or indeterminate damages. The Company and its subsidiaries are also involved in other reviews, investigations, and proceedingsby governmental and self-regulatory organizations regarding our business, which may result in adverse judgments, settlements, fines,penalties, injunctions, and other relief. In view of the number and diversity of claims against our company, the number of jurisdictionsin which litigation is pending, and the inherent difficulty of predicting the outcome of litigation and other claims, we cannotstate with certainty what the eventual outcome of pending litigation or other claims will be. Notwithstanding this uncertainty,the Company does not believe that the results of these claims are likely to have a material effect on its financial position orresults of operations.
On January 5, 2017, complaintsfiled in November 2015 and May 2016 naming MLV & Co. (“MLV”), a broker-dealer subsidiary of B. Riley Securities(fka FBR), as a defendant in putative class action lawsuits alleging claims under the Securities Act, in connection with the offeringsof Miller Energy Resources, Inc. (“Miller”) have been consolidated. The Master Consolidated Complaint, styled Gaynorv. Miller et al., is pending in the United States District Court for the Eastern District of Tennessee, and, like its predecessorcomplaints, continues to allege claims under Sections 11 and 12 of the Securities Act against nine underwriters for alleged materialmisrepresentations and omissions in the registration statement and prospectuses issued in connection with six offerings (February13, 2013; May 8, 2013; June 28, 2013; September 26, 2013; October 17, 2013 (as to MLV only) and August 21, 2014) with an allegedaggregate offering price of approximately $151,000. The Court ordered mediation before a federal magistrate took place on August6, 2019, with no resolution. In December 2019, the Court remanded the case to state court. In July 2020, the Company signed a bindingterm sheet to settle this matter, subject to court approval which is expected to be received in early 2021. An accrual for thesettlement is included in the accompanying consolidated financial statements.
Item 4. MINE SAFETY DISCLOSURES
Not applicable.
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PART II
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATEDSTOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Stock Market and Other Information
Our common stockis traded on the NASDAQ Global Market under the symbol: “RILY”. From July 16, 2015 to November 15, 2016, our commonstock was traded on the NASDAQ Capital Market under the symbol “RILY”. Prior to July 16, 2015, our common stock wastraded on the OTC Bulletin Board under the symbol “RILY” from November 7, 2014 to July 16, 2015.
As of February 24,2021, there were approximately 129 holders of record of our Common Stock. This number does not include beneficial owners holdingshares through nominees or in “street” name.
Dividend Policy
From time to time,we may decide to pay dividends which will be dependent upon our financial condition and results of operations. While it is theBoard’s current intention to make regular dividend payments each quarter and special dividend payments dependent upon exceptionalcircumstances from time to time, our Board of Directors may reduce or discontinue the payment of dividends at any time for anyreason it deems relevant. The declaration and payment of any future dividends or repurchases of our common stock will be made atthe discretion of our Board of Directors and will be dependent upon our financial condition, results of operations, cash flows,capital expenditures, and other factors that may be deemed relevant by our Board of Directors.
Share Performance Graph
The following graph compares the cumulativetotal shareholder return on our common share with the cumulative total return on the Russell 2000 Index and a peer group indexfor the period from December 31, 2015 to December 31, 2020. The graph and table below assume that $100 was invested on the startingdate and dividends, if any, were reinvested on the date of payment without payment of any commissions. The performance shown inthe graph and table represents past performance and should not be considered an indication of future performance.
| As of December 31, | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | ||||||||||||||||||
| B. Riley Financial, Inc. | $ | 100 | $ | 192 | $ | 196 | $ | 160 | $ | 302 | $ | 563 | ||||||||||||
| Russell 2000 | $ | 100 | $ | 119 | $ | 135 | $ | 119 | $ | 147 | $ | 174 | ||||||||||||
| Industry Peer Group | $ | 100 | $ | 113 | $ | 128 | $ | 108 | $ | 124 | $ | 148 | ||||||||||||
Our peer group indexincludes the following companies: Cowen Group, Inc.; JMP Group LLC; Oppenheimer Holdings Inc.; and Stifel Financial Corp. Thesecompanies were selected because their businesses and operations were comparable to ours throughout or for some portion of the five-yearperiod presented in the chart above.
The information providedabove under the heading “Share Performance Graph” shall not be considered “filed” for purposes of Section18 of the Exchange Act or incorporated by reference in any filing under the Securities Act of 1933, as amended or the ExchangeAct.
55
Item 6. SELECTED FINANCIAL DATA
The following tablesets forth our selected consolidated financial data as of and for each of the five fiscal years ended December 31, 2020, 2019,2018, 2017 and 2016 and is derived from our Consolidated Financial Statements. The Consolidated Financial Statements as of December31, 2020 and 2019, and for each of the years in the three-year period ended December 31, 2020, are included elsewhere in this report.The following data should be read in conjunction with “Management’s Discussion and Analysis of Financial Conditionand Results of Operations” and the Consolidated Financial Statements and Notes thereto included elsewhere in this report.
Consolidated Statement of OperationsData:
(Dollars in thousands, except share data)
| Year Ended December 31, | ||||||||||||||||||||
| 2020 | 2019 | 2018 | 2017 | 2016 | ||||||||||||||||
| Revenues: | ||||||||||||||||||||
| Services and fees | $ | 667,069 | $ | 460,493 | $ | 392,080 | $ | 288,906 | $ | 160,015 | ||||||||||
| Trading income (loss) and fair value adjustments on loans | 104,018 | 106,463 | (8,004 | ) | 13,207 | 4,212 | ||||||||||||||
| Interest income - Loans and securities lending | 102,499 | 77,221 | 38,277 | 19,756 | 8 | |||||||||||||||
| Sale of goods | 29,135 | 7,935 | 638 | 307 | 26,116 | |||||||||||||||
| Total revenues | 902,721 | 652,112 | 422,991 | 322,176 | 190,351 | |||||||||||||||
| Operating expenses: | ||||||||||||||||||||
| Direct cost of services | 60,451 | 58,824 | 34,754 | 40,625 | 26,874 | |||||||||||||||
| Cost of goods sold | 12,460 | 7,575 | 800 | 398 | 14,755 | |||||||||||||||
| Selling, general and administrative expenses | 428,537 | 385,219 | 310,508 | 227,884 | 96,110 | |||||||||||||||
| Restructuring charge | 1,557 | 1,699 | 8,506 | 12,374 | 3,887 | |||||||||||||||
| Impairment of tradenames | 12,500 | — | — | — | — | |||||||||||||||
| Interest expense - Securities lending and loan participations sold | 42,451 | 32,144 | 23,039 | 12,051 | — | |||||||||||||||
| Total operating expenses | 557,956 | 485,461 | 377,607 | 293,332 | 141,626 | |||||||||||||||
| Operating income | 344,765 | 166,651 | 45,384 | 28,844 | 48,725 | |||||||||||||||
| Other income (expense): | ||||||||||||||||||||
| Interest income | 564 | 1,577 | 1,326 | 420 | 318 | |||||||||||||||
| (Loss) income from equity investments | (623 | ) | (1,431 | ) | 7,986 | (437 | ) | — | ||||||||||||
| Interest expense | (65,249 | ) | (50,205 | ) | (33,393 | ) | (8,382 | ) | (1,996 | ) | ||||||||||
| Income before income taxes | 279,457 | 116,592 | 21,303 | 20,445 | 47,047 | |||||||||||||||
| Provision for income taxes | (75,440 | ) | (34,644 | ) | (4,903 | ) | (8,510 | ) | (14,321 | ) | ||||||||||
| Net income | 204,017 | 81,948 | 16,400 | 11,935 | 32,726 | |||||||||||||||
| Net (loss) income attributable to noncontrolling interests | (1,131 | ) | 337 | 891 | 379 | 11,200 | ||||||||||||||
| Net income attributable to B. Riley Financial, Inc. | 205,148 | 81,611 | 15,509 | 11,556 | 21,526 | |||||||||||||||
| Preferred stock dividends | 4,710 | 264 | — | — | — | |||||||||||||||
| Net income available to common shareholders | $ | 200,438 | $ | 81,347 | $ | 15,509 | $ | 11,556 | $ | 21,526 | ||||||||||
| Basic income per common share | $ | 7.83 | $ | 3.08 | $ | 0.60 | $ | 0.50 | $ | 1.19 | ||||||||||
| Diluted income per common share | $ | 7.56 | $ | 2.95 | $ | 0.58 | $ | 0.48 | $ | 1.17 | ||||||||||
| Weighted average basic common shares outstanding | 25,607,278 | 26,401,036 | 25,937,305 | 23,181,388 | 18,106,621 | |||||||||||||||
| Weighted average diluted common shares outstanding | 26,508,397 | 27,529,157 | 26,764,856 | 24,290,904 | 18,391,852 | |||||||||||||||
Consolidated Balance Sheet Data:
(Dollars in thousands)
| As of December 31, | ||||||||||||||||||||
| 2020 | 2019 | 2018 | 2017 | 2016 | ||||||||||||||||
| Cash and cash equivalents | $ | 103,602 | $ | 104,268 | $ | 179,440 | $ | 132,823 | $ | 112,105 | ||||||||||
| Restricted cash | 1,235 | 471 | 838 | 19,711 | 3,294 | |||||||||||||||
| Securities and other investments owned, at fair value | 777,319 | 451,551 | 273,577 | 145,360 | 16,579 | |||||||||||||||
| Total assets | 2,662,730 | 2,318,178 | 1,957,710 | 1,386,904 | 264,618 | |||||||||||||||
| Total liabilities | 2,123,770 | 1,927,927 | 1,699,050 | 1,121,058 | 114,226 | |||||||||||||||
| Total equity | 538,960 | 390,251 | 258,660 | 265,846 | 150,392 | |||||||||||||||
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Item 7. MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This report containsforward-looking statements. These statements relate to future events or our future financial performance. In some cases, you canidentify forward-looking statements by terminology such as “may,” “will,” “should,” “could,”“expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,”“future,” “intend,” “seek,” “likely,” “potential” or “continue,”the negative of such terms or other comparable terminology. These statements are only predictions. Actual events or results maydiffer materially.
Although we believethat the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels ofactivity, performance or achievements. Moreover, neither we, nor any other person, assume responsibility for the accuracy and completenessof the forward-looking statements. Except as required by law we are under no obligation to update any of the forward-looking statementsafter the filing of this Annual Report to conform such statements to actual results or to changes in our expectations.
The following discussionof our financial condition and results of operations should be read in conjunction with our consolidated financial statements andthe related notes and other financial information appearing elsewhere in this Annual Report. Readers are also urged to carefullyreview and consider the various disclosures made by us which attempt to advise interested parties of the factors which affect ourbusiness, including without limitation the disclosures made in Item 1A of Part II of this Annual Report under the caption “RiskFactors.”
Risk factors thatcould cause actual results to differ from those contained in the forward-looking statements include but are not limited to risksrelated to: volatility in our revenues and results of operations; changing conditions in the financial markets; our ability togenerate sufficient revenues to achieve and maintain profitability; our exposure to credit risk; the short term nature of our engagements;the accuracy of our estimates and valuations of inventory or assets in “guarantee” based engagements; competition inthe asset management business; potential losses related to our auction or liquidation engagements; our dependence on communications,information and other systems and third parties; potential losses related to purchase transactions in our auction and liquidationsbusiness; the potential loss of financial institution clients; potential losses from or illiquidity of our proprietary investments;changing economic and market conditions; potential liability and harm to our reputation if we were to provide an inaccurate appraisalor valuation; potential mark-downs in inventory in connection with purchase transactions; failure to successfully compete in anyof our segments; loss of key personnel; our ability to borrow under our credit facilities or at-the-market offering as necessary;failure to comply with the terms of our credit agreements or senior notes; our ability to meet future capital requirements; ourability to realize the benefits of our completed acquisitions, including our ability to achieve anticipated opportunities and operatingcost savings, and accretion to reported earnings estimated to result from completed and proposed acquisitions in the time frameexpected by management or at all; the diversion of management time on acquisition- related issues; the failure of our brand investmentportfolio licensees to pay us royalties; and the intense competition to which our brand investment portfolio is subject. We undertakeno obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future eventsor otherwise.
Except as otherwiserequired by the context, references in this Annual Report to the “Company,” “B. Riley,” “B. RileyFinancial,” “we,” “us” or “our” refer to the combined business of B. Riley Financial,Inc. and all of its subsidiaries.
Overview
General
B. Riley Financial,Inc. (NASDAQ: RILY) and its subsidiaries provide collaborative financial services and solutions through several operating subsidiariesincluding:
| ● | B. Riley Securities, Inc. (“B. Riley Securities”) is a leading, full service investmentbank providing financial advisory, corporate finance, research, securities lending and sales and trading services to corporate,institutional and high net worth individual clients. B. Riley Securities,(fka B. Riley FBR) was formed in November 2017 through the merger of B. Riley & Co, LLC and FBR Capital Markets &Co., which the Company acquired in June 2017. |
| ● | B. Riley Wealth Management, Inc . (“B.Riley Wealth Management”) provides comprehensive wealth management and brokerage services to individuals and families,corporations and non-profit organizations, including qualified retirement plans, trusts, foundations and endowments. B. Riley WealthManagement was formerly Wunderlich Securities, Inc., which the Company acquired on July 3, 2017 and whose name was changed in June2018. |
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| ● | B. Riley Capital Management, LLC, a Securities and Exchange Commission (“SEC”) registeredinvestment advisor, which includes: |
| o | B. Riley Asset Management, an advisor to certain private funds and to institutional and high networth investors. |
| o | Great American Capital Partners, LLC (“GACP”), the general partner of two private funds,GACP I, L.P. and GACP II, L.P., both direct lending funds managed by WhiteHawk Capital Partners, L.P. pursuant to an investmentadvisory services agreement, that provide senior secured loans and second lien secured loan facilities to middle market publicand private U.S. companies. |
| ● | B. Riley Advisory Services provides expert witness, bankruptcy, financial advisory, forensic accounting,valuation and appraisal, and operations management services. |
| ● | B. Riley Retail Solutions, LLC (fka Great American Group, LLC), a leading provider of asset dispositionand auction solutions to a wide range of retail and industrial clients. |
| ● | B. Riley Real Estate works with real estate owners and tenantsthrough all stages of the real estate life cycle. Our real estate advisors advise companies, financial institutions, investors,family offices and individuals on real estate projects worldwide. A core focus of B. Riley real estate is the restructuring oflease obligations in both distressed and non-distressed situations, both inside and outside of the bankruptcy process, on behalfof corporate tenants. |
| ● | B. Riley Principal Investments identifies attractive investmentopportunities and aims to deliver financial and operational improvement to its portfolio companies. Our team concentrates on opportunitiespresented by distressed companies or divisions that exhibit challenging market dynamics. Representative transactions include recapitalization,direct equity investment, debt investment, active minority investment and buyouts. B. Riley Principal Investments seeks to controlor influence the operations of our investments to deliver financial and operational improvements that will maximize free cash flow,and therefore, shareholder returns. As part of our principal investment strategy, we acquired United Online, Inc. (“UOL”or “United Online”) on July 1, 2016, magicJack VocalTec Ltd. (“magicJack”) on November 14, and on November30, we acquired a 40% equity interest in with Lingo Management, LLC (“Lingo”), with the ability to acquire an additional40% equity interest therein. |
| o | UOL is a communications company that offers consumer subscription services and products, consistingof Internet access services and devices under the NetZero and Juno brands primarily sold in the United States. |
| o | magicJack is a Voice over IP (“VoIP”) cloud-based technology and services communicationsprovider. |
| o | Lingo is a global cloud/UC and managed service provider. |
| ● | BR Brand Holding, LLC (“BR Brands”), in which theCompany owns a majority interest, provides licensing of certain brand trademarks. BR Brand owns the assets and intellectual propertyrelated to licenses of six brands: Catherine Malandrino, English Laundry, Joan Vass, Kensie Girl, Limited Too and NanetteLepore as well as investments in the Hurley and Justice brands with Bluestar Alliance LLC (“Bluestar”), a brand managementcompany. |
We areheadquartered in Los Angeles with offices in major cities throughout the United States including New York, Chicago, Boston,Atlanta, Dallas, Memphis, Metro Washington D.C and West Palm Beach.
During the fourth quarter of 2020, the Company realigned itssegment reporting structure to reflect organizational management changes. Under the new structure, the valuation and appraisalbusinesses are reported in the Financial Consulting segment and our bankruptcy, financial advisory, forensic accounting, and realestate consulting businesses that were previously reported in the Capital Markets segment are now reported as part of the FinancialConsulting segment. In conjunction with the new reporting structure, the Company recast its segment presentation for all periodspresented.
For financial reportingpurposes we classify our businesses into five operating segments: (i) Capital Markets, (ii) Auction and Liquidation, (iii) FinancialConsulting, (iv) Principal Investments – United Online and magicJack and(v) Brands .
Capital Markets Segment .Our Capital Markets segment provides a full array of investmentbanking, corporate finance, consulting, financial advisory, research, securities lending, wealth management and sales and tradingservices to corporate, institutional and individual clients. Our corporate finance and investment banking services include mergerand acquisitions as well as restructuring advisory services to public and private companies, initial and secondary public offerings,and institutional private placements. In addition, we trade equity securities as a principal for our account, including investmentsin funds managed by our subsidiaries. Our Capital Markets segment also includes our asset management businesses that manage variousprivate and public funds for institutional and individual investors.
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Auction and LiquidationSegment. Our Auction and Liquidation segment utilizes our significant industry experience, a scalable network of independentcontractors and industry-specific advisors to tailor our services to the specific needs of a multitude of clients, logistical challengesand distressed circumstances. Furthermore, our scale and pool of resources allow us to offer our services across North Americanas well as parts of Europe, Asia and Australia. Our Auction and Liquidation segment operates through two main divisions, retailstore liquidations and wholesale and industrial assets dispositions. Our wholesale and industrial assets dispositions divisionoperates through limited liability companies that are controlled by us.
Financial ConsultingSegment. Our Financial Consulting segment provides services to law firms,corporations, financial institutions, lenders, and private equity firms. These services primarily include bankruptcy, financialadvisory, forensic accounting, litigation support, real estate consulting and valuation and appraisal services. Our Financial Consultingsegment operates through limited liability companies that are wholly owned or majority owned by us.
Principal Investments- United Online and magicJack Segment. Our Principal Investments - United Online and magicJack segment consists of businesseswhich have been acquired primarily for attractive investment return characteristics. Currently, this segment includes UOL, throughwhich we provide consumer Internet access, and magicJack, through which we provide VoIP communication and related product and subscriptionservices.
Brands Segment. Our Brands segment consists of our brand investment portfolio that is focused on generating revenue through the licensing of trademarksand is held by BR Brand.
RecentDevelopments
On March 1, 2021, theCompany announced its intention to redeem at par, and at its option, $128.2 million of senior notes due in February 2027 (“7.50%2027 Notes”) on March 31, 2021 pursuant to the second supplemental indenture dated May 31, 2017. The total redemption paymentwill include approximately $1.6 million in accrued interest.
On February 25, 2021,the Company completed the acquisition of National Holdings Corporation (“National), pursuant to an agreement and plan ofmerger dated January 10, 2021, following the successful completion of a tender offer commenced by us on January 27, 2021. Nationalis a full-service investment banking and asset management firm that, through its affiliates, provides a range of services includingfinancial advisory, investment banking, institutional sales and trading, equity research, financial planning, market making, taxpreparation and insurance to corporations, institutions, high net-worth individuals and retail investors. We previously owned approximately45% of the common stock of National. National complements our Capital Markets segment, bringing approximately 900 registered representativesmanaging over $30 billion in assets.
On January 25, 2021, theCompany issued $230,000 of senior notes due in January 2028 (“6.0% 2028 Notes”) pursuant to the prospectus supplementdated February 12, 2020. Interest on the 6.0% 2028 Notes is payable quarterly at 6.0%. The 6.0% 2028 Notes are unsecured and dueand payable in full on January 31, 2028. In connection with the issuance of the 6.0% 2028 Notes, the Company received net proceedsof $225,746 (after underwriting commissions, fees and other issuance costs of $4,254). The Notes bear interest at the rate of 6.0%per annum.
On January 23, 2021,we committed up to $400.0 million aggregate principal amount of debt financing, consisting of $100.0 million of secured debt financing,and $300.0 million of unsecured debt financing, to affiliates of Franchise Group, Inc. (collectively, “FRG”) in connectionwith FRG’s acquisition of Pet Supplies Plus.
OnJanuary 15, 2021, the Company issued 1,413,045 shares of common stock inclusive of 184,310 shares issued pursuant to the fullexercise of the Underwriter’s option to purchase additional shares of common stock at a price of $46.00 per share for netproceeds of approximately $61,370 after underwriting fees and costs.
On November 30, 2020we closed a recapitalization transaction with Lingo Management, LLC (“Lingo”), a global cloud/UC and managed serviceprovider. Pursuant to the recapitalization, B. Riley purchased Lingo’s existing indebtedness held by affiliates of GarrisonInvestment Group and converted a portion of such indebtedness into a 40% equity interest in Lingo with the ability to acquirean additional 40% equity interest in consideration for the conversion of an additional portion of such indebtedness.
On January 30, 2020, the World Health Organization (“WHO”)announced a global health emergency because of a new strain of coronavirus (the “COVID-19 outbreak”). InMarch 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally. Cominginto 2021, the full impact of the COVID-19 outbreak continues to evolve, as countries across the world manage repeated waves ofthe pandemic and vaccines come to market. The impact of the COVID-19 outbreak on our results of operations, financialposition and cash flows will depend on future developments, including the duration and spread of the outbreak and related advisoriesand restrictions and the success of vaccines in slowing or halting the pandemic. These developments and the impact ofthe COVID-19 outbreak on the financial markets and the overall economy continue to be highly uncertain and cannot be predicted.If the financial markets and/or the overall economy continue to be impacted for an extended period, our results of operations,financial position and cash flows may be materially adversely affected.
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Results of Operations
The following periodto period comparisons of our financial results and our interim results are not necessarily indicative of future results.
Year Ended December 31, 2020 Compared to Year Ended December31, 2019
Consolidated Statements of Income
(Dollars in thousands)
|
Year Ended
December 31, 2020 |
Year Ended
December 31, 2019 |
Change | ||||||||||||||||||||||
| Amount | % | Amount | % | Amount | % | |||||||||||||||||||
| Revenues: | ||||||||||||||||||||||||
| Services and fees | $ | 667,069 | 73.9 | % | $ | 460,493 | 70.6 | % | $ | 206,576 | 44.9 | % | ||||||||||||
| Trading income and fair value adjustments on loans | 104,018 | 11.5 | % | 106,463 | 16.3 | % | (2,445 | ) | (2.3 | %) | ||||||||||||||
| Interest income - Loans and securities lending | 102,499 | 11.4 | % | 77,221 | 11.8 | % | 25,278 | 32.7 | % | |||||||||||||||
| Sale of goods | 29,135 | 3.2 | % | 7,935 | 1.2 | % | 21,200 | n/m | ||||||||||||||||
| Total revenues | 902,721 | 100.0 | % | 652,112 | 100.0 | % | 250,609 | 38.4 | % | |||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||
| Direct cost of services | 60,451 | 6.7 | % | 58,824 | 9.0 | % | 1,627 | 2.8 | % | |||||||||||||||
| Cost of goods sold | 12,460 | 1.4 | % | 7,575 | 1.2 | % | 4,885 | 64.5 | % | |||||||||||||||
| Selling, general and administrative expenses | 428,537 | 47.5 | % | 385,219 | 59.1 | % | 43,318 | 11.2 | % | |||||||||||||||
| Restructuring charge | 1,557 | 0.2 | % | 1,699 | 0.3 | % | (142 | ) | (8.4 | %) | ||||||||||||||
| Impairment of tradenames | 12,500 | 1.4 | % | — | 0.0 | % | 12,500 | 100.0 | % | |||||||||||||||
| Interest expense - Securities lending and loan participations sold | 42,451 | 4.7 | % | 32,144 | 4.9 | % | 10,307 | 32.1 | % | |||||||||||||||
| Total operating expenses | 557,956 | 61.9 | % | 485,461 | 74.5 | % | 72,495 | 14.9 | % | |||||||||||||||
| Operating income | 344,765 | 38.2 | % | 166,651 | 25.6 | % | 178,114 | 106.9 | % | |||||||||||||||
| Other income (expense): | ||||||||||||||||||||||||
| Interest income | 564 | 0.1 | % | 1,577 | 0.2 | % | (1,013 | ) | (64.2 | %) | ||||||||||||||
| Loss on equity investments | (623 | ) | (0.1 | %) | (1,431 | ) | (0.2 | %) | 808 | 56.5 | % | |||||||||||||
| Interest expense | (65,249 | ) | (7.2 | %) | (50,205 | ) | (7.7 | %) | (15,044 | ) | 30.0 | % | ||||||||||||
| Income before income taxes | 279,457 | 31.0 | % | 116,592 | 17.9 | % | 162,865 | 139.7 | % | |||||||||||||||
| Provision for income taxes | (75,440 | ) | (8.4 | %) | (34,644 | ) | (5.3 | %) | (40,796 | ) | 117.8 | % | ||||||||||||
| Net income | 204,017 | 22.6 | % | 81,948 | 12.6 | % | 122,069 | 149.0 | % | |||||||||||||||
| Net (loss) income attributable to noncontrolling interests | (1,131 | ) | (0.1 | %) | 337 | 0.1 | % | (1,468 | ) | n/m | ||||||||||||||
| Net income attributable to B. Riley Financial, Inc. | 205,148 | 22.7 | % | 81,611 | 12.5 | % | 123,537 | 151.4 | % | |||||||||||||||
| Preferred stock dividends | 4,710 | 0.5 | % | 264 | 0.0 | % | 4,446 | n/m | ||||||||||||||||
| Net income available to common shareholders | $ | 200,438 | 22.2 | % | $ | 81,347 | 12.5 | % | $ | 119,091 | 146.4 | % | ||||||||||||
| n/m - Not applicable or not meaningful. | ||||||||||||||||||||||||
Revenues
The table below andthe discussion that follows are based on how we analyze our business.
| Year Ended | Year Ended | |||||||||||||||||||||||
| December 31, 2020 | December 31, 2019 | Change | ||||||||||||||||||||||
| Amount | % | Amount | % | Amount | % | |||||||||||||||||||
| Revenues - Services and fees: | ||||||||||||||||||||||||
| Capital Markets segment | $ | 412,222 | 45.7 | % | $ | 264,703 | 40.6 | % | $ | 147,519 | 55.7 | % | ||||||||||||
| Auction and Liquidation segment | 63,101 | 7.0 | % | 18,296 | 2.8 | % | 44,805 | 244.9 | % | |||||||||||||||
| Financial Consulting segment | 91,622 | 10.1 | % | 76,292 | 11.7 | % | 15,330 | 20.1 | % | |||||||||||||||
| Principal Investments - United Online and magicJack segment | 83,666 | 9.3 | % | 97,147 | 14.9 | % | (13,481 | ) | (13.9 | %) | ||||||||||||||
| Brands segment | 16,458 | 1.8 | % | 4,055 | 0.6 | % | 12,403 | n/m | ||||||||||||||||
| Subtotal | 667,069 | 73.9 | % | 460,493 | 70.6 | % | 206,576 | 44.9 | % | |||||||||||||||
| Revenues - Sale of goods | ||||||||||||||||||||||||
| Auction and Liquidation segment | 25,663 | 2.8 | % | 4,220 | 0.6 | % | 21,443 | n/m | ||||||||||||||||
| Principal Investments - United Online and magicJack segment | 3,472 | 0.4 | % | 3,715 | 0.6 | % | (243 | ) | (6.5 | %) | ||||||||||||||
| Subtotal | 29,135 | 3.2 | % | 7,935 | 1.2 | % | 21,200 | n/m | ||||||||||||||||
| Trading income and fair value adjustments on loans | ||||||||||||||||||||||||
| Capital Markets segment | 104,018 | 11.5 | % | 106,463 | 16.3 | % | (2,445 | ) | (2.3 | %) | ||||||||||||||
| Interest income - Loans and securities lending: | ||||||||||||||||||||||||
| Capital Markets segment | 102,499 | 11.4 | % | 77,221 | 11.8 | % | 25,278 | 32.7 | % | |||||||||||||||
| Total revenues | $ | 902,721 | 100.0 | % | $ | 652,112 | 100.0 | % | $ | 250,609 | 38.4 | % | ||||||||||||
60
Total revenues increasedapproximately $250.6 million to $902.7 million during the year ended December 31, 2020 from $652.1 million during the year endedDecember 31, 2019. The increase in revenues during the year ended December 31, 2019 was primarily due to an increase in revenuefrom services and fees of $206.6 million, an increase in revenue from interest income — loans and securities lending of $25.3million and increase in revenue from sale of goods of $21.2 million, partially offset by a decrease in revenue from trading incomeand fair value adjustments on loans of $2.4 million. The increase in revenue from services and fees of $206.6 million in 2020 wasprimarily due to an increase in revenue of $147.5 million in the Capital Markets segment, $44.8 million in the Auction and Liquidationsegment, $15.3 million in the Financial Consulting segment and $12.4 million in the Brands segment, partially offset by a decreaseof $13.5 million in the Principal Investments - United Online and magicJack segment.
Revenues from servicesand fees in the Capital Markets segment increased approximately $147.5 million, to $412.2 million during the year ended December31, 2020 from $264.7 million during the year ended December 31, 2019. The increase in revenues was primarily due to increases inrevenue of $125.5 million from corporate finance, consulting and investment banking fees, in commissions of $5.9 million and inother income, including investment dividends of $20.3 million, partially offset by a decrease of $4.2 million in wealth and assetmanagement fees.
Revenues from servicesand fees in the Auction and Liquidation segment increased $44.8 million, to $63.1 million during the year ended December 31, 2020from $18.3 million during the year ended December 31, 2019. The increase in revenues in the Auction and Liquidation segment wasprimarily due to an increase in the number of fee related retail liquidation engagements in 2020 as compared to 2019. Revenuesin 2019 were negatively impacted from a loss incurred for a retail liquidation contract that was entered into during the fourthquarter of 2019 to liquidate the assets of a retailer where the funds advanced exceeded the proceeds recovered from the liquidationof inventory. During the first half of 2020, the impact of COVID-19 resulted in delays and the temporary stoppage of certain retailliquidation engagements. In June 2020, these retail liquidation engagements resumed as a number of states allowed the reopeningof retail stores.
Revenues from servicesand fees in the Financial Consulting segment increased $15.3 million, to $91.6 million during the year ended December 31, 2020from $76.3 million during the year ended December 31, 2019. The increase in revenues was primarily due to increases in revenueof $16.6 million from consulting fees and in other income of $0.7 million, partiallyoffset by a decrease of $2.0 million in valuation and appraisal fees.
Revenues from servicesand fees in the Principal Investments - United Online and magicJack segment decreased $13.5 million to $83.7 million year endedDecember 31, 2020 from $97.1 million during the year ended December 31, 2019. The decrease in revenues from services and fees isa result of a decrease in subscription services of $9.4 million and a decrease in advertising licensing and other of $4.3 million.Management expects revenues from the Principal Investments - United Online and magicJack segment to continue to decline year overyear.
Revenues from servicesand fees in the Brands segment increased approximately $12.4 million, to $16.5 million during the year ended December 31, 2020from $4.1 million for the year ended December 31, 2019. We established the Brands segment in 2019 following the acquisition ofa majority interest in BR Brands on October 28, 2019. The primary source of revenue included in this segment is the licensing oftrademarks.
Trading income andfair value adjustments on loans decreased $2.4 million to income of $104.0 million during the year ended December 31, 2020 from$106.5 million for the year ended December 31, 2019. Fair value adjustments on our loans receivable at fair value included unrealizedlosses of $22.0 million and gains of $12.3 million during the year ended December 31, 2020 and 2019, respectively. Realized andunrealized trading gains on investments made in our proprietary trading account were $126.1 million and $94.2 million during theyear ended December 31, 2020 and 2019, respectively. Investments held in our proprietary trading account increased to $777.3 millionat December 31, 2020 from $408.2 million at December 31, 2019.
Interest income –loans and securities lending increased $25.3 million, to $102.5 million during the year ended December 31, 2020 from $77.2 millionduring the year ended December 31, 2019. Interest income from securities lending was $51.3 million and $40.2 million during theyear ended December 31, 2020 and 2019, respectively. Interest income from loans was $49.2 million and $34.6 million during theyear ended December 31, 2020 and 2019, respectively. The increase in interest income on loans was primarily due to the increasein lending activities in our Capital Markets segment which included an increase in loans receivable to $390.7 million at December31, 2020 from $269.2 million at December 31, 2019.
61
Sale of Goods, Cost of Goods Sold andGross Margin
| Year Ended December 31, 2020 | Year Ended December 31, 2019 | |||||||||||||||||||||||
|
Auction and
Liquidation Segment |
Principal
Investments - United Online and magicJack Segment |
Total |
Auction and
Liquidation Segment |
Principal
Investments - United Online and magicJack Segment |
Total | |||||||||||||||||||
| Revenues - Sale of Goods | $ | 25,663 | $ | 3,472 | $ | 29,135 | $ | 4,220 | $ | 3,715 | $ | 7,935 | ||||||||||||
| Cost of goods sold | 9,766 | 2,694 | 12,460 | 4,016 | 3,559 | 7,575 | ||||||||||||||||||
| Gross margin on sale of goods | $ | 15,897 | $ | 778 | $ | 16,675 | $ | 204 | $ | 156 | $ | 360 | ||||||||||||
| Gross margin percentage | 61.9 | % | 22.4 | % | 57.2 | % | 4.8 | % | 4.2 | % | 4.5 | % | ||||||||||||
Revenuesfrom the sale of goods increased $21.2 million, to $29.1 million during the year ended December 31, 2020 from $7.9 million duringthe year ended December 31, 2019. The increase in revenues from sale of goods was primarily attributable to the sale of goods forcertain retail liquidation engagements where we acquired the title to inventory goods in Europe and operated the retail storesas part of a going-out-of-business sale. Cost of goods sold for the year ended December 31, 2020 was $12.5 million, resulting ina gross margin of 57.2%.
Operating Expenses
Direct Cost of Services. Direct cost of services and direct cost of services measured as a percentage of revenues – services and fees by segment duringthe year ended December 31, 2020 and 2019 are as follows:
| Year Ended December 31, 2020 | Year Ended December 31, 2019 | |||||||||||||||||||||||
|
Auction and
Liquidation Segment |
Principal
Investments - United Online and magicJack Segment |
Total |
Auction and
Liquidation Segment |
Principal
Investments - United Online and magicJack Segment |
Total | |||||||||||||||||||
| Revenues - Services and fees | $ | 63,101 | $ | 83,666 | $ | 18,296 | $ | 97,147 | ||||||||||||||||
| Direct cost of services | 40,730 | 19,721 | $ | 60,451 | 33,296 | 25,529 | $ | 58,825 | ||||||||||||||||
| Gross margin on services and fees | $ | 22,371 | $ | 63,945 | $ | (15,000 | ) | $ | 71,618 | |||||||||||||||
| Gross margin percentage | 35.5 | % | 76.4 | % | -82.0 | % | 73.7 | % | ||||||||||||||||
Total direct costsincreased $1.6 million, to $60.5 million during the year ended December 31, 2020 from $58.8 million during the year ended December31, 2019. Direct costs of services increased by $7.4 million in the Auction and Liquidation segment partially offset by a decreaseof $5.8 million in the Principal Investments - United Online and magicJack segment. The increase in direct costs in the Auctionand Liquidation segment was primarily due to the costs incurred to operate the retail stores where we acquired title to inventorygoods in Europe and operated a going-out-of-business sale. The decrease in direct costs in the Principal Investments — UnitedOnline and magicJack segment was primarily a result of the sale of a lower gross margin division of magicJack in May2019, as well as the impact of cost reductions initiatives in 2020.
Auction andLiquidation
Gross margin in the Auction and Liquidation segment for servicesand fees increased to 35.5% of revenues during the year ended December 31, 2020, as compared to a loss of 82.0% of revenues duringthe year ended December 31, 2019. The margin in the Auction and Liquidation segment in 2020 is primarily the result of an increasein the number of fee related engagements during 2020 as compared to 2019. The margin in 2020 is higher than the loss in 2019 sincethe results in 2019 included a loss incurred for a retail liquidation contract that was entered into during the fourth quarterof 2019 to liquidate the assets of a retailer where the funds advanced exceeded the proceeds recovered from the liquidation ofinventory.
Principal Investments- United Online and magicJack
Gross margins in thePrincipal Investments - United Online and magicJack segment increased to 76.4% of revenues year ended December 31, 2020 as comparedto 73.7% of revenues during the year ended December 31, 2019. The increase in margin in the Principal Investments — UnitedOnline and magicJack segment is primarily due to the sale of a lower gross margin division of magicJack in May2019, as well as the impact of cost reductions initiatives in 2020.
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Selling, Generaland Administrative Expenses. Selling, general and administrative expenses during the year ended December 31, 2020 and 2019were comprised of the following:
Selling, General and Administrative Expenses
|
Year Ended
December 31, 2020 |
Year Ended
December 31, 2019 |
Change | ||||||||||||||||||||||
| Amount | % | Amount | % | Amount | % | |||||||||||||||||||
| Capital Markets segment | $ | 271,596 | 63.4 | % | $ | 244,574 | 63.4 | % | $ | 27,022 | 11.0 | % | ||||||||||||
| Auction and Liquidation segment | 12,359 | 2.9 | % | 10,738 | 2.8 | % | 1,621 | 15.1 | % | |||||||||||||||
| Financial Consulting segment | 68,579 | 16.0 | % | 58,478 | 15.2 | % | 10,101 | 17.3 | % | |||||||||||||||
| Principal Investments - United Online and magicJack segment | 31,363 | 7.3 | % | 36,914 | 9.6 | % | (5,551 | ) | (15.0 | %) | ||||||||||||||
| Brands segment | 5,747 | 1.3 | % | 1,388 | 0.4 | % | 4,359 | 314.0 | % | |||||||||||||||
| Corporate and Other segment | 38,893 | 9.1 | % | 33,127 | 8.6 | % | 5,766 | 17.4 | % | |||||||||||||||
| Total selling, general & administrative expenses | $ | 428,537 | 100.0 | % | $ | 385,219 | 100.0 | % | $ | 43,318 | 11.2 | % | ||||||||||||
Total selling, generaland administrative expenses increased $43.3 million to $428.6 million during the year ended December 31, 2020 from $385.2 millionfor the year ended December 31, 2019. The increase of $43.3 million in selling, general and administrative expenses was due toan increase of $27.0 million in the Capital Markets segment, an increase of $1.6 million in the Auction and Liquidation segment,an increase of $10.1 million in the Financial Consulting segment, an increase of $4.4 million in the Brands segment and an increaseof $5.8 million in the Corporate and Other segment, partially offset by a decrease of $5.5 million in the Principal Investments- United Online and magicJack segment.
Capital Markets
Selling, general andadministrative expenses in the Capital Markets segment increased by $27.0 million to $271.6 million during the year ended December31, 2020 from $244.6 million during the year ended December 31, 2019. The increase was primarily due to increases of $32.7 millionin payroll and related expenses, $2.6 million in legal expenses and $2.3 million in investment banking deal expenses; partiallyoffset by decreases of $2.9 million in consulting expenses, $2.1 million in travel and entertainment expenses, $2.0 million inoccupancy expenses, $1.6 million in business development expenses, $0.9 million in clearing charges and $0.6 million in depreciationand amortization.
Auction and Liquidation
Selling, general andadministrative expenses in the Auction and Liquidation segment increased by $1.6 million to $12.4 million during the year endedDecember 31, 2020 from $10.7 million during the year ended December 31, 2019. The increase in selling, general and administrativeexpenses in the Auction and Liquidation segment was primarily due to an increase of $1.5 million in other business developmentactivities.
Financial Consulting
Selling, general andadministrative expenses in the Financial Consulting segment increased by $10.1 million to $68.6 million during the year ended December31, 2020 from $58.5 million during the year ended December 31, 2019. The increase in selling, general and administrative expensesin the Financial Consulting segment was primarily due to increases of $11.2 million in payroll and related expenses and $1.5 millionin other expenses, partially offset by a decrease of $2.5 million in travel and entertainment expenses.
Principal Investments- United Online and magicJack
Selling, general andadministrative expenses in the Principal Investments - United Online and magicJack segment decreased by $5.6 million to $31.4 millionfor the year ended December 31, 2020 from $36.9 million for the year ended December 31, 2019. The decrease in selling, generaland administrative expenses in the Principal Investments — United Online and magicJack segment is primarily due to decreasesof $1.5 million in payroll and related expenses, $2.1 million in legal expenses, $1.0 million in other expenses and $0.9 millionin depreciation and amortization expense.
Brands
Selling, general andadministrative expenses in the Brands segment increased by $4.4 million to $5.7 million during the year ended December 31, 2020from $1.4 million for the year ended December 31, 2019. We established the Brands segment in 2019 following the acquisition ofa majority equity interest in BR Brands on October 28, 2019.
Corporate and Other
Selling, general andadministrative expenses for the Corporate and Other segment increased $5.8 million to $38.9 million during the year ended December31, 2020 from $33.1 million for the year ended December 31, 2019. The increase of expenses in the Corporate and Other segment forthe year ended December 31, 2020 was primarily due to increases in payroll and related expenses.
63
RestructuringCharge . Restructuring charges of $1.6 million during the year ended December 31, 2020 were primarily related to impairmentof certain acquired tradename intangibles associated with the Company’s brand realignment across its subsidiary companies to provide greater external consistency and affiliation. The restructuring chargesof $1.7 million for the year ended December 31, 2019 were primarily related to severance costs for magicJack employees from a reductionin workforce and lease termination costs in the Principal Investments – United Online and magicJack segment.
Impairment of tradenames . Due to the impact of the COVID-19 outbreak on economic activity and market volatility, wetested our intangible assets as of March 31, 2020 and June 30, 2020 and made the determination that the indefinite-livedtradenames in the Brands segment were impaired and the Company recognized impairment charges of $12.5 million.
Other Income (Expense). Other income included interest income of $0.6 million during the year ended December 31, 2020 compared to $1.6 million during theyear ended December 31, 2019. Loss on equity investments was $0.6 million during the year ended December 31, 2020 compared to lossof $1.4 million during the year ended December 31, 2019. Interest expense was $65.2 million during the year ended December 31,2020 compared to $50.2 million during the year ended December 31, 2019. The increase in interest expense during the year endedDecember 31, 2020 was primarily due to an increase in interest expense of $17.4 million from the issuance of senior notes, partiallyoffset by a decrease in interest expense of $2.2 million from the term loan.
Income Before IncomeTaxes . Income before income taxes increased $162.9 million to income before income taxes of $279.5 million during the yearended December 31, 2020 from an income before income taxes of $116.6 million during the year ended December 31, 2019. The increasein income before income taxes was primarily due to an increase in revenues of approximately $250.6 million partially offset byan increase in operating expenses of $72.5 million, an increase in interest expense of $15.0 million and a decrease in loss fromequity investments of $0.8 million.
Provision for IncomeTaxes. Provision for income taxes was $75.4 million during the year ended December 31, 2020 compared to provision for incometaxes of $34.6 million during the year ended December 31, 2019. The effective income tax rate was a provision of 27.0% for theyear ended December 31, 2020 as compared to a provision of 29.7% for the year ended December 31, 2019.
Net (Loss) IncomeAttributable to Noncontrolling Interest . Net income attributable to noncontrolling interests represents the proportionate shareof net income generated by BR Brand, 20% of the membership interest of which we do not own and Great American Global Partners,LLC, 50% of the membership interest of which we do not own. The net loss attributable to noncontrolling interests was $1.1 millionduring the year ended December 31, 2020 compared to income of $0.3 million during the year ended December 31, 2019.
Net Income Attributableto the Company . Net income attributable to the Company for the year ended December 31, 2020 was $205.1 million, an increaseof net income of $123.5 million, from net income attributable to the Company of $81.6 million for the year ended December 31, 2019.Increase in net income attributable to the Company during the year ended December 31, 2020 as compared to the same period in 2019was primarily due to an increase in operating income of $178.1 million, offset by an increase in interest expense of approximately$15.0 million, a decrease in loss from equity investments of $0.8 million and an increase in provision for income taxes of $40.8million.
Preferred Stock Dividends .On October 7, 2019, the Company closed its public offering of Depositary Shares, each representing 1/1000th of a share of 6.875%Series A Cumulative Perpetual Preferred Stock, par value $0.0001 per share. Holders of Series A Preferred Stock, when and as authorizedby the board of directors of the Company, are entitled to cumulative cash dividends at the rate of 6.875% per annum of the $25,000liquidation preference ($25.00 per Depositary Share) per year (equivalent to $1,718.75 or $1.71875 per Depositary Share). Dividendswill be payable quarterly in arrears, on or about the last day of January, April, July and October. On January 9, 2020, the Companydeclared a cash dividend representing $0.4296875 per Depositary Share, which was paid on January 31, 2020 to holders of recordas of the close of business on January 21, 2020. On April 13, 2020, the Company declared a cash dividend $0.4296875 per DepositaryShare, which was paid on April 30, 2020 to holders of record as of the close of business on April 23, 2020. On July 7, 2020, theCompany declared a cash dividend $0.4296875 per Depositary Share, which was paid on July 31, 2020 to holders of record as of theclose of business on July 21, 2020. On October 8, 2020, the Company declared a cash dividend $0.4296875 per Depositary Share, whichwas paid on October 31, 2020, to holders of record as of the close of business on October 21, 2020.
On September 4, 2020,the Company closed its public offering of Depositary Shares, each representing 1/1000th of a share of 7.375% Series B CumulativePerpetual Preferred Stock (trading under the NASDAQ symbol “RILYL”), par value $0.0001 per share. Holders of SeriesB Preferred Stock, when and as authorized by the board of directors of the Company, are entitled to cumulative cash dividends atthe rate of 7.375% per annum of the $25,000 liquidation preference ($25.00 per Depositary Share) per year (equivalent to $1,843.75or $1.84375 per Depositary Share). Dividends will be payable quarterly in arrears, on or about the last day of January, April,July and October. On October 8, 2020, the Company declared a cash dividend $0.29193 per Depositary Share, which was paid on October31, 2020, to holders of record as of the close of business on October 21, 2020.
Net Income Availableto Common Shareholders . Net income available to common shareholders for the year ended December 31, 2020 was $200.4 million,an increase of $119.1 million, from net income available to common shareholders of $81.3 million for the year ended December 31,2019. The increase in net income available to common shareholders during the year ended December 31, 2020 as compared to the sameperiod in 2019 was primarily due to an increase in operating income of $178.1 million, offset by an increase in interest expenseof approximately $15.0 million, an increase in preferred stock dividends of $4.4 million and an increase in provision for incometaxes of $40.8 million.
64
Year Ended December 31, 2019 Compared to Year Ended December31, 2018
Consolidated Statements of Income
(Dollars in thousands)
|
Year Ended
December 31, 2019 |
Year Ended
December 31, 2018 |
Change | ||||||||||||||||||||||
| Amount | % | Amount | % | Amount | % | |||||||||||||||||||
| Revenues: | ||||||||||||||||||||||||
| Services and fees | $ | 460,493 | 70.6 | % | $ | 392,080 | 92.7 | % | $ | 68,413 | 17.4 | % | ||||||||||||
| Trading income (loss) and fair value adjustments on loans | 106,463 | 16.3 | % | (8,004 | ) | (1.9 | %) | 114,467 | n/m | |||||||||||||||
| Interest income - Loans and securities lending | 77,221 | 11.8 | % | 38,277 | 9.0 | % | 38,944 | 101.7 | % | |||||||||||||||
| Sale of goods | 7,935 | 1.2 | % | 638 | 0.2 | % | 7,297 | n/m | ||||||||||||||||
| Total revenues | 652,112 | 100.0 | % | 422,991 | 100.0 | % | 229,121 | 54.2 | % | |||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||
| Direct cost of services | 58,824 | 9.0 | % | 34,754 | 8.2 | % | 24,070 | 69.3 | % | |||||||||||||||
| Cost of goods sold | 7,575 | 1.2 | % | 800 | 0.2 | % | 6,775 | n/m | ||||||||||||||||
| Selling, general and administrative expenses | 385,219 | 59.1 | % | 310,508 | 73.4 | % | 74,711 | 24.1 | % | |||||||||||||||
| Restructuring charge | 1,699 | 0.3 | % | 8,506 | 2.0 | % | (6,807 | ) | (80.0 | %) | ||||||||||||||
| Interest expense - Securities lending and loan participations sold | 32,144 | 4.9 | % | 23,039 | 5.4 | % | 9,105 | 39.5 | % | |||||||||||||||
| Total operating expenses | 485,461 | 74.5 | % | 377,607 | 89.2 | % | 107,854 | 28.6 | % | |||||||||||||||
| Operating income | 166,651 | 25.6 | % | 45,384 | 10.7 | % | 121,267 | n/m | ||||||||||||||||
| Other income (expense): | ||||||||||||||||||||||||
| Interest income | 1,577 | 0.2 | % | 1,326 | 0.3 | % | 251 | 18.9 | % | |||||||||||||||
| (Loss) income on equity investments | (1,431 | ) | (0.2 | %) | 7,986 | 1.9 | % | (9,417 | ) | (117.9 | %) | |||||||||||||
| Interest expense | (50,205 | ) | (7.7 | %) | (33,393 | ) | (7.9 | %) | (16,812 | ) | 50.3 | % | ||||||||||||
| Income before income taxes | 116,592 | 17.9 | % | 21,303 | 5.0 | % | 95,289 | n/m | ||||||||||||||||
| Provision for income taxes | (34,644 | ) | (5.3 | %) | (4,903 | ) | (1.2 | %) | (29,741 | ) | n/m | |||||||||||||
| Net income | 81,948 | 12.6 | % | 16,400 | 3.9 | % | 65,548 | n/m | ||||||||||||||||
| Net income attributable to noncontrolling interests | 337 | 0.1 | % | 891 | 0.2 | % | (554 | ) | (62.2 | %) | ||||||||||||||
| Net income attributable to B. Riley Financial, Inc. | 81,611 | 12.5 | % | 15,509 | 3.7 | % | 66,102 | n/m | ||||||||||||||||
| Preferred stock dividends | 264 | 0.0 | % | — | 0.0 | % | 264 | n/m | ||||||||||||||||
| Net income available to common shareholders | $ | 81,347 | 12.5 | % | $ | 15,509 | 3.7 | % | $ | 65,838 | n/m | |||||||||||||
n/m- Not applicable or not meaningful.
Revenues
The table below andthe discussion that follows are based on how we analyze our business.
| Year Ended | Year Ended | |||||||||||||||||||||||
| December 31, 2019 | December 31, 2018 | Change | ||||||||||||||||||||||
| Amount | % | Amount | % | Amount | % | |||||||||||||||||||
| Revenues - Services and fees: | ||||||||||||||||||||||||
| Capital Markets segment | $ | 264,703 | 40.6 | % | $ | 232,074 | 54.9 | % | $ | 32,629 | 14.1 | % | ||||||||||||
| Auction and Liquidation segment | 18,296 | 2.8 | % | 54,923 | 13.0 | % | (36,627 | ) | (66.7 | %) | ||||||||||||||
| Financial Consulting segment | 76,292 | 11.7 | % | 51,424 | 12.2 | % | 24,868 | 48.4 | % | |||||||||||||||
| Principal Investments - United Online and magicJack segment | 97,147 | 14.9 | % | 53,659 | 12.7 | % | 43,488 | 81.0 | % | |||||||||||||||
| Brands segment | 4,055 | 0.6 | % | — | 0.0 | % | 4,055 | 100.0 | % | |||||||||||||||
| Subtotal | 460,493 | 70.6 | % | 392,080 | 92.7 | % | 68,413 | 17.4 | % | |||||||||||||||
| Revenues - Sale of goods | ||||||||||||||||||||||||
| Auction and Liquidation segment | 4,220 | 0.6 | % | 63 | 0.0 | % | 4,157 | n/m | ||||||||||||||||
| Principal Investments - United Online and magicJack segment | 3,715 | 0.6 | % | 575 | 0.1 | % | 3,140 | n/m | ||||||||||||||||
| Subtotal | 7,935 | 1.2 | % | 638 | 0.2 | % | 7,297 | n/m | ||||||||||||||||
| Trading income (losses) and fair value adjustments on loans | ||||||||||||||||||||||||
| Capital Markets segment | 106,463 | 16.3 | % | (8,004 | ) | -1.9 | % | 114,467 | n/m | |||||||||||||||
| Subtotal | 106,463 | 16.3 | % | (8,004 | ) | -1.9 | % | 114,467 | n/m | |||||||||||||||
| Interest income - Loans and securities lending: | ||||||||||||||||||||||||
| Capital Markets segment | 77,221 | 11.8 | % | 38,277 | 9.0 | % | 38,944 | 101.7 | % | |||||||||||||||
| Total revenues | $ | 652,112 | 100.0 | % | $ | 422,991 | 100.0 | % | $ | 229,121 | 54.2 | % | ||||||||||||
65
Total revenues increasedapproximately $229.1 million to $652.1 million during the year ended December 31, 2019 from $423.0 million during the year endedDecember 31, 2018. The increase in revenues during the year ended December 31, 2019 was primarily due to an increase in revenuefrom services and fees of $68.4 million, an increase in revenue from interest income — loans and securities lending of $38.9million, an increase in revenue from trading income (losses) and fair value adjustments on loans of $114.5 million and increasein revenue from sale of goods of $7.3 million. The increase in revenue from services and fees of $68.4 million in 2019 was primarilydue to an increase in revenue of $32.6 million in the Capital Markets segment, $24.9 million in the Financial Consulting segment,$43.5 million in the Principal Investments - United Online and magicJack segment and $4.1 million in the Brands segment, partiallyoffset by a decrease of $36.6 million in the Auction and Liquidation segment.
Revenues from servicesand fees in the Capital Markets segment increased approximately $32.6 million, to $264.7 million during the year ended December31, 2019 from $232.1 million during the year ended December 31, 2018. The increase in revenues was primarily due to an increasein revenue of $24.2 million from corporate finance, consulting and investment banking fees and an increase in asset management fees and carried interest of $8.3 million.
Revenues from servicesand fees in the Auction and Liquidation segment decreased $36.6 million, to $18.3 million during the year ended December 31, 2019from $54.9 million during the year ended December 31, 2018. The decrease in revenues of $36.6 million was primarily due to a decreasein revenues of $31.8 million from services and fees related to retail liquidation engagements and a decrease in revenues of $2.5million from services and fees in our wholesale and industrial auction division. The $31.8 million decrease in revenues from retailliquidation engagements was caused by a retail engagement loss incurred for a contract entered into during the fourth quarter of2019 to liquidate the assets of a retailer where the funds advanced exceed the expected recovery.
Revenues fromservices and fees in the Financial Consulting segment increased $24.9 million, to $76.3 million during the year endedDecember 31, 2019 from $51.4 million during the year ended December 31, 2018. The increase in revenues was primarily due toan increase in revenue of $24.8 million from bankruptcy, financial advisory, and forensic accounting services primarily as a result of the acquisition of GlassRatner on August 1, 2018.
Revenues from servicesand fees in the Principal Investments - United Online and magicJack segment increased $43.5 million to $97.1 million year endedDecember 31, 2019 from $53.7 million during the year ended December 31, 2018. The increase in revenues from services and fees isa result of the acquisition of magicJack on November 14, 2018 in the segment for the full year ended December 31, 2019 which increasedrevenue $53.3 million from the year ended December 31, 2018. This increase was partially offset by a decrease in services and feesrevenue from UOL of $9.8 million. Management expects revenues from UOL continue to decline year over year. The primary source ofrevenue included in this segment is subscription services revenue and some advertising and other revenues.
Revenues from servicesand fees in the Brands segment were $4.1 million for the year ended December 31, 2019. We established the Brands segment in 2019following the acquisition of a majority interest in BR Brands on October 28, 2019. The primary source of revenue included in thissegment is the licensing of trademarks.
Trading income (losses)and fair value adjustments on loans increased $114.5 million to income of $106.5 million for the year ended December 31, 2019 froma loss of $8.0 million during the year ended December 31, 2018. Investments made in our proprietary trading account increased to$408.2 million at December 31, 2019 from $273.6 million at December 31, 2018.
Interest income –loans and securities lending increased $38.9 million, to $77.2 million during the year ended December 31, 2019 from $38.3 millionduring the year ended December 31, 2018. Interest income from securities lending was $40.2 million and $31.8 million during theyear ended December 31, 2019 and 2018, respectively. Interest income from loans was $34.6 million and $6.5 million during the yearended December 31, 2019 and 2018, respectively. The increase in interest income on loans was primarily due to the increase in lendingactivities in our Capital Markets segment which included an increase in loans receivable to $269.2 million at December 31, 2019from $38.8 million at December 31, 2018.
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Sale of Goods, Cost of Goods Sold andGross Margin
| Year Ended December 31, 2019 | Year Ended December 31, 2018 | |||||||||||||||||||||||
|
Auction and
Liquidation Segment |
Principal
Investments - United Online and magicJack Segment |
Total |
Auction and
Liquidation Segment |
Principal
Investments - United Online and magicJack Segment |
Total | |||||||||||||||||||
| Revenues - Sale of Goods | $ | 4,220 | $ | 3,715 | $ | 7,935 | $ | 63 | $ | 575 | $ | 638 | ||||||||||||
| Cost of goods sold | 4,016 | 3,559 | 7,575 | 41 | 759 | 800 | ||||||||||||||||||
| Gross margin on sale of goods | $ | 204 | $ | 156 | $ | 360 | $ | 22 | $ | (184 | ) | $ | (162 | ) | ||||||||||
| Gross margin percentage | 4.8 | % | 4.2 | % | 4.5 | % | 34.9 | % | (32.0 | %) | (25.4 | %) | ||||||||||||
Revenuesfrom the sale of goods increased $7.3 million, to $7.9 million during the year ended December 31, 2019 from $0.6 million duringthe year ended December 31, 2018. The increase in revenues from sale of goods were primarily attributable to $4.2 million of goodssold as part of our retail liquidation engagements and $3.1 million of sales of magicJack devices that are sold in connection withVoIP services and, to a lesser extent, sale of mobile broadband devices from UOL that are sold in connection with the mobile broadbandservices. Cost of goods sold for the year ended December 31, 2019 was $7.6 million, resulting in a gross margin of 4.5%.
Operating Expenses
Direct Cost of Services. Direct cost of services and direct cost of services measured as a percentage of revenues – services and fees by segment duringthe year ended December 31, 2019 and 2018 are as follows:
| Year Ended December 31, 2019 | Year Ended December 31, 2018 | |||||||||||||||||||||||
|
Auction and
Liquidation Segment |
Principal
Investments - United Online and magicJack Segment |
Total |
Auction and
Liquidation Segment |
Principal
Investments - United Online and magicJack Segment |
Total | |||||||||||||||||||
| Revenues - Services and fees | $ | 18,296 | $ | 97,147 | $ | 54,923 | $ | 53,659 | ||||||||||||||||
| Direct cost of services | 33,296 | 25,529 | $ | 58,825 | 19,627 | 15,127 | $ | 34,754 | ||||||||||||||||
| Gross margin on services and fees | $ | (15,000 | ) | $ | 71,618 | $ | 35,296 | $ | 38,532 | |||||||||||||||
| Gross margin percentage | -82.0 | % | 73.7 | % | 64.3 | % | 71.8 | % | ||||||||||||||||
Total direct costsincreased $24.1 million, to $58.8 million during the year ended December 31, 2019 from $34.8 million during the year ended December31, 2018. Direct costs of services increased by $13.7 million in the Auction and Liquidation segment and $10.4 million in the PrincipalInvestments - United Online and magicJack segment. The increase in direct costs in the Auction and Liquidation segment was primarilydue to mix of engagement types performed during the year ended December 31, 2019 as compared to the year ended December 31, 2018.The increase in direct costs in the Principal Investments - United Online and magicJack segment was primarily as a result of theacquisition of magicJack on November 14, 2018.
Auction andLiquidation
Gross margin in theAuction and Liquidation segment for services and fees decreased to a loss of 82.0% of revenues during the year ended December 31,2019, as compared to 64.3% of revenues during the year ended December 31, 2018. The decrease in margin in the Auction and Liquidationsegment is due to a retail engagement loss incurred for a contract entered into during the fourth quarter of 2019 to liquidatethe assets of a retailer where the funds advanced exceed the expected recovery.
Principal Investments- United Online and magicJack
Gross margins in thePrincipal Investments - United Online and magicJack segment increased to 73.7% of revenues year ended December 31, 2019 as comparedto 71.8% of revenues during the year ended December 31, 2018. The increase in margin in the Principal Investments - United Onlineand magicJack segment is primarily due to the mix of revenues of services and fees and as a result of the acquisition of magicJackon November 14, 2018.
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Selling, Generaland Administrative Expenses. Selling, general and administrative expenses during the year ended December 31, 2019 and 2018were comprised of the following:
Selling, General and Administrative Expenses
| Year Ended | Year Ended | |||||||||||||||||||||||
| December 31, 2019 | December 31, 2018 | Change | ||||||||||||||||||||||
| Amount | % | Amount | % | Amount | % | |||||||||||||||||||
| Capital Markets segment | $ | 244,575 | 63.4 | % | $ | 223,532 | 71.9 | % | $ | 21,043 | 9.4 | % | ||||||||||||
| Auction and Liquidation segment | 10,737 | 2.8 | % | 8,305 | 2.7 | % | 2,432 | 29.3 | % | |||||||||||||||
| Financial Consulting segment | 58,478 | 15.2 | % | 37,573 | 12.1 | % | 20,905 | 55.6 | % | |||||||||||||||
| Principal Investments - United Online and magicJack segment | 36,914 | 9.6 | % | 18,563 | 6.0 | % | 18,351 | 98.9 | % | |||||||||||||||
| Brands segment | 1,388 | 0.4 | % | — | 0.0 | % | 1,388 | 100.0 | % | |||||||||||||||
| Corporate and Other segment | 33,127 | 8.6 | % | 22,535 | 7.3 | % | 10,592 | 47.0 | % | |||||||||||||||
| Total selling, general & administrative expenses | $ | 385,219 | 100.0 | % | $ | 310,508 | 100.0 | % | $ | 74,711 | 24.1 | % | ||||||||||||
Total selling, generaland administrative expenses increased $74.7 million to $385.2 million during the year ended December 31, 2019 from $310.5 millionfor the year ended December 31, 2018. The increase of $74.7 million in selling, general and administrative expenses was due toan increase of $21.0 million in the Capital Markets segment, an increase of $2.4 million in the Auction and Liquidation segment,an increase of $20.9 million in the Financial Consulting segment, an increase of $18.4 million in the Principal Investments - UnitedOnline and magicJack segment an increase of $1.4 million in the Brands segment and an increase of $10.6 million in the Corporateand Other segment.
Capital Markets
Selling, generaland administrative expenses in the Capital Markets segment increased by $21.0 million to $244.6 million during the year endedDecember 31, 2019 from $223.5 million during the year ended December 31, 2018. The increase was primarily due to an increaseof $3.0 million in payroll and related expenses, $11.1 million in professional advisory fees incurred in connection with themanagement of certain investments that are included in securities and other investments owned and $9.0 million inother expenses, partially offset by a decrease of $2.0 million in occupancy expenses.
Auction and Liquidation
Selling, general andadministrative expenses in the Auction and Liquidation segment increased by $2.4 million to $10.7 million during the year endedDecember 31, 2019 from $8.3 million during the year ended December 31, 2018. The increase in selling, general and administrativeexpenses in the Auction and Liquidation segment was primarily due to an increase of $2.0 million in payroll and related expenses.
Financial Consulting
Selling, generaland administrative expenses in the Financial Consulting segment increased by $20.9 million to $58.5 million during the yearended December 31, 2019 from $37.6 million during the year ended December 31, 2018. The increase was primarily due toincreases of $15.9 million in payroll and related expenses, $2.1 million in other expenses, $1.1 million in occupancyexpenses and $0.8 million in travel and entertainment expenses. The increase in expenses was primarily as a result of the acquisition of GlassRatner on August 1, 2018.
Principal Investments- United Online and magicJack
Selling, general andadministrative expenses in the Principal Investments - United Online and magicJack segment increased by $18.4 million to $36.9million for the year ended December 31, 2019 from $18.6 million for the year ended December 31, 2018. The increase in selling,general and administrative expenses in the Principal Investments - United Online and magicJack segment is due to the acquisitionof magicJack on November 14, 2018. magicJack’s selling, general and administrative expenses included in the segment for theyear ended December 31, 2019 was $22.3 million.
Brands
Selling, general andadministrative expenses in the Brands segment was $1.4 million for the year ended December 31, 2019. We established the Brandssegment in 2019 following the acquisition of a majority equity interest in BR Brands on October 28, 2019.
Corporate and Other
Selling, general andadministrative expenses for the Corporate and Other segment increased $10.6 million to $33.1 million during the year ended December31, 2019 from $22.5 million for the year ended December 31, 2018. The increase of expenses in the Corporate and Other segment forthe year ended December 31, 2019 was primarily due to an increase of $9.2 million in payroll and related expenses.
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RestructuringCharge . Restructuring charge decreased $6.8 million to $1.7 million for the year ended December 31, 2019. The restructuringcharges during the year ended December 31, 2019 were primarily related to severance costs for magicJack employees from a reductionin workforce and lease termination costs in the Principal Investments – United Online and magicJack segment. The re structuringcharge of $8.5 million during the year ended December 31, 2018 was primarily related to severance costs and lease loss accrualsfor the planned consolidation of office space related to operations in the Capital Markets segment and the impairment of tradenamefor the rebranding of B. Riley Wealth Management.
Other Income (Expense). Other income included interest income of $1.6 million during the year ended December 31, 2019 compared to $1.3 million during theyear ended December 31, 2018. Loss on equity investments was $1.4 million during the year ended December 31, 2019 compared to incomeof $8.0 million during the year ended December 31, 2018. Interest expense was $50.2 million during the year ended December 31,2019 compared to $33.4 million during the year ended December 31, 2018. The increase in interest expense during the year endedDecember 31, 2019 was primarily due to an increase in interest expense of $18.4 million from the issuance of senior notes, andan increase in interest expense of $4.2 million from the term loan dated December 2018, offset by a decrease in interest expenseon our asset based credit facility and other borrowings in connection with retail liquidation engagements of $6.4 million.
Income Before IncomeTaxes . Income before income taxes increased $95.3 million to income before income taxes of $116.6 million during the year endedDecember 31, 2019 from an income before income taxes of $21.3 million during the year ended December 31, 2018. The increase inincome before income taxes was primarily due to an increase in revenues of approximately $229.1 million offset by an increase inoperating expenses of $107.9 million, and a decrease in income from equity investments of $9.4 million and an increase in interestexpense of $16.8 million.
Provision for IncomeTaxes. Provision for income taxes was $34.6 million during the year ended December 31, 2019 compared to provision for incometaxes of $4.9 million during the year ended December 31, 2018. The effective income tax rate was a provision of 29.7% for the yearended December 31, 2019 as compared to a provision of 23.0% for the year ended December 31, 2018.
Net Income Attributableto Noncontrolling Interest . Net income attributable to noncontrolling interests represents the proportionate share of net incomegenerated by BR Brand, 20% of the membership interest of which we do not own and Great American Global Partners, LLC, 50% of themembership interest of which we do not own. The net income attributable to noncontrolling interests was $0.3 million during theyear ended December 31, 2019 compared to $0.9 million during the year ended December 31, 2018.
Net Income Attributableto the Company . Net income attributable to the Company for the year ended December 31, 2019 was $81.6 million, an increaseof net income of $66.1 million, from net income attributable to the Company of $15.5 million for the year ended December 31, 2018.Increase in net income attributable to the Company during the year ended December 31, 2019 as compared to the same period in 2018was primarily due to an increase in operating income of $121.3 million, offset by an increase in interest expense of approximately$16.8 million, a decrease in income from equity investments of $9.4 million and an increase in provision for income taxes of $29.7million.
PreferredStock Dividends . On October 7, 2019, the Company closed its public offering of Depositary Shares, each representing 1/1000thof a share of 6.875% Series A Cumulative Perpetual Preferred Stock, par value $0.0001 per share. Holders of Series A PreferredStock, when and as authorized by the board of directors of the Company, are entitled to cumulative cash dividends at the rate of6.875% per annum of the $25,000 liquidation preference ($25.00 per Depositary Share) per year (equivalent to $1,718.75 or $1.71875per Depositary Share). Dividends will be payable quarterly in arrears, on or about the last day of January, April, July and October.On October 15, 2019, the Company declared a cash dividend of $0.3 million representing $0.11458333 per Depositary Share. The dividendwas paid on October 31, 2019 to holders of record as of the close of business on October 21, 2019. On January 9, 2020, the Companydeclared a cash dividend representing $0.4296875 per Depositary Share, which was paid on January 31, 2019 to holders of recordas of the close of business on January 21, 2019.
Net Income Availableto Common Shareholders . Net income available to common shareholders for the year ended December 31, 2019 was $81.3 million,an increase of $65.8 million, from net income available to common shareholders of $15.5 million for the year ended December 31,2018. The increase in net income available to common shareholders during the year ended December 31, 2019 as compared to the sameperiod in 2018 was primarily due to an increase in operating income of $121.3 million, offset by an increase in interest expenseof approximately $16.8 million, a decrease in income from equity investments of $9.4 million and an increase in provision for incometaxes of $29.7 million.
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Liquidity and CapitalResources
Our operations are fundedthrough a combination of existing cash on hand, cash generated from operations, borrowings under our senior notes payable, termloan and credit facility, issuances of common and preferred stock and special purposes financing arrangements.
During the years endedDecember 31, 2020 and 2019, we generated net income attributable to the Company of $205.2 million and $81.6 million, respectively.Our cash flows and profitability are impacted by the number and size of retail liquidation and capital markets engagements performedon a quarterly and annual basis.
Asof December 31, 2020, we had $103.6 million of unrestricted cash and cash equivalents, $1.2 million of restricted cash, $777.3million of securities and other investments held at fair value, $390.7 million of loans receivable, held at fair value, and $1,000.3million of borrowings outstanding. The borrowings outstanding of $1,000.3 million at December 31, 2020 included (a) $870.8million of borrowings from the issuance of the series of Senior Notes that are due at various dates ranging from May 31, 2023 toDecember 31, 2027 with interest rates ranging from 6.375% to 7.5%, (b) $74.2 million term loan borrowed pursuant to the BRPAC CreditAgreement discussed below, (c) $38.0 million of notes payable, and (d) $17.3 million of loan participations sold .
We believe that ourcurrent cash and cash equivalents, securities and other investments owned, funds available under our asset based credit facility,and cash expected to be generated from operating activities will be sufficient to meet our working capital and capital expenditurerequirements for at least the next 12 months from issuance date of the accompanying financial statements. We continue to monitorour financial performance to ensure sufficient liquidity to fund operations and execute on our business plan.
Cash Flow Summary
| Year Ended December 31, | ||||||||||||
| 2020 | 2019 | 2018 | ||||||||||
| (Dollars in thousands) | ||||||||||||
| Net cash provided by (used in): | ||||||||||||
| Operating activities | $ | 57,689 | $ | (27,198 | ) | $ | (102,186 | ) | ||||
| Investing activities | (128,446 | ) | (298,590 | ) | (154,069 | ) | ||||||
| Financing activities | 69,544 | 250,176 | 284,859 | |||||||||
| Effect of foreign currency on cash | 1,311 | 73 | (860 | ) | ||||||||
| Net increase (decrease) in cash, cash equivalents and restricted cash | $ | 98 | $ | (75,539 | ) | $ | 27,744 | |||||
Year Ended December31, 2020 Compared to Year Ended December 31, 2019
Cash provided by operatingactivities was $57.7 million during the year ended December 31, 2020 compared to cash used in operating activities of $27.2 millionduring the year ended December 31, 2019. Cash provided by operating activities for the year ended December 31, 2020 included netincome of $204.0 million adjusted for noncash items of $123.4 million and changes in operating assets and liabilities of $269.7million. Noncash items of $123.4 million include (a) deferred income taxes of $61.6 million, (b) noncash fair value adjustmentsof $22.0 million, (c) depreciation and amortization of $19.4 million, (d) share-based compensation of $18.6 million, (e) othernoncash interest and other of $16.8 million, (f) impairment of leaseholds, intangibles and lease loss accrual and gain on disposalof fixed assets of $14.1 million, (g) provision for doubtful accounts of $3.4 million, (h) gain on extinguishment of debt of $1.6million, (i) dividends from equity investments of $1.3 million, (j) income allocated for mandatorily redeemable noncontrollinginterests of $1.2 million, and (k) loss on equity investments of $0.6 million.
Cash used in investingactivities was $128.4 million during the year ended December 31, 2020 compared to cash used in investing activities of $298.6 millionfor the year ended December 31, 2019. During the year ended December 31, 2020, cash used in investing activities consisted of cashused for purchases of loans receivable of $207.5 million, cash used for purchases of equity investments of $14.0 million, repaymentsof loan participations sold of $2.2 million, cash used for acquisition of businesses of $1.5 million and cash used for purchasesof property and equipment and intangible assets of $2.0 million, offset by cash received from loans receivable repayment of $90.1million, loan participations sold of $6.9 million and proceeds from sale of loans receivable to related party of $1.8 million.During the year ended December 31, 2019, cash used in investing activities consisted of cash used for loans receivable of $343.8million, cash used for purchases of equity investments of $33.4 million, repayments of loan participations sold of $18.9 million,cash used for purchase of a majority equity interest in BR Brands, net of cash acquired of $114.9 million and cash used for purchasesof property and equipment and intangible assets of $3.5 million, offset by proceeds from sale of division of magicJack of $6.2million, cash received from loans receivable repayment of $159.2 million, loan participations sold of $31.8 million, distributionsfrom equity investments of $18.2 million and proceeds from sale of property, equipment and intangible assets of $0.5 million.
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Cash provided byfinancing activities was $69.5 million during the year ended December 31, 2020 compared to cash provided by financingactivities of $250.2 million during the year ended December 31, 2019. During the year ended December 31, 2020, cash providedby financing activities primarily consisted of $75.0 million proceeds from our term loan, $186.8 million proceeds fromissuance of senior notes, $0.6 million contributions from noncontrolling interests, $39.5 million proceeds from our offeringof preferred stock, offset by (a) $37.1 million used for repayment of our asset based credit facility, (b) $38.8 million usedto pay dividends on our common shares, (c) $67.3 million used for repayment on our term loan, (d) $48.2 million used torepurchase our common stock, (e) $1.8 million used to repurchase our senior notes; (f) $3.4 million used to pay debt issuancecosts, (g) $22.6 million used for payment of employment taxes on vesting of restricted stock, (h) $3.8 million distributionto noncontrolling interests, (i) $0.4 million used to repay our other notes payable, (j) $4.7 million used to pay dividendson our preferred shares and (k) $4.3 million used for payment of participating note payable and contingent consideration.During the year ended December 31, 2019, cash provided by financing activities primarily consisted of $10.0 million proceedsfrom our term loan, $281.9 million proceeds from issuance of senior notes, $140.4 million proceeds from our asset basedcredit facility $56.6 million proceeds from our offering of preferred stock, offset by (a) $103.3 million used for repaymentof our asset based credit facility, (b) $41.1 million used to pay dividends on our common shares, (c) $22.7 million used forrepayment on our term loan, (d) $7.1 million used to repurchase our common stock and warrants, (e) $4.3 million used forpayment of participating note payable and contingent consideration; (f) $3.4 million used to pay debt issuance costs, (g)$2.0 million used for payment of employment taxes on vesting of restricted stock, (h) $2.0 million distribution tononcontrolling interests, and (i) $0.5 million used to repay our other notes payable.
Year Ended December31, 2019 Compared to Year Ended December 31, 2018
Cash used in operatingactivities was $27.2 million during the year ended December 31, 2019 compared to cash used in operating activities of $102.2 millionduring the year ended December 31, 2018. Cash used in operating activities for the year ended December 31, 2019 included net incomeof $81.9 million adjusted for noncash items of $53.4 million and changes in operating assets and liabilities of $162.6 million.Noncash items of $53.4 million include (a) depreciation and amortization of $19.0 million, (b) share-based compensation of $15.9million, (c) loss on equity investments of $1.4 million, (d) provision for doubtful accounts of $2.1 million, (e) income allocatedand fair value adjustment for mandatorily redeemable noncontrolling interests of $1.2 million, (f) other noncash interest and otherof $12.3 million, (g) deferred income taxes of $10.9 million, (h) impairment of leaseholds, intangibles and lease loss accrualand gain on disposal of fixed assets of $0.3 million, (i) dividends from equity investments of $3.2 million and (j) noncash interestand other of $12.3 million.
Cashused in investing activities was $298.6 million during the year ended December 31, 2019 compared to cash used in investing activitiesof $154.1 million for the year ended December 31, 2018. During the year ended December 31, 2019, cash used in investing activitiesconsisted of cash used for loans receivable of $343.8 million, cash used for purchases of equity investments of $33.4 million,repayments of loan participations sold of $18.9 million, cash used for purchase of a majority equity interest in BR Brands, netof cash acquired of $114.9 million and cash used for purchases of property and equipment and intangible assets of $3.5 million,offset by proceeds from sale of division of magicJack of $6.2 million, cash received from loans receivable repayment of $159.2million, loan participations sold of $31.8 million, distributions from equity investments of $18.2 million and proceeds from saleof property, equipment and intangible assets of $0.5 million. During the year ended December 31, 2018, cash used in investingactivities consisted of cash used to purchase loans receivable of $38.8 million, cash used for the acquisition of magicJack, netof cash acquired of $89.2 million, cash used for purchases of equity investments of $16.6 million, cash used of $4.0 million toacquire a business and cash use of $5.4 million for purchases of property and equipment.
Cash provided by financingactivities was $250.2 million during the year ended December 31, 2019 compared to cash provided by financing activities of $284.9million during the year ended December 31, 2018. During the year ended December 31, 2019, cash provided by financing activitiesprimarily consisted of $10.0 million proceeds from our term loan, $281.9 million proceeds from issuance of senior notes, $140.4million proceeds from our asset based credit facility $56.6 million proceeds from our offering of preferred stock, offset by (a)$103.3 million used for repayment of our asset based credit facility, (b) $41.1 million used to pay dividends on our common shares,(c) $22.7 million used for repayment on our term loan, (d) $7.1 million used to repurchase our common stock and warrants, (e) $4.3million used for payment of participating note payable and contingent consideration; (f) $3.4 million used to pay debt issuancecosts, (g) $2.0 million used for payment of employment taxes on vesting of restricted stock, (h) $2.0 million distribution to noncontrollinginterests, and (i) $0.5 million used to repay our other notes payable. During the year ended December 31, 2018, cash provided byfinancing activities primarily consisted of (a) $300.0 million proceeds from asset based credit facility, (b) $259.0 million proceedsfrom issuance of senior notes, (c) $80.0 million proceeds from our term loan and (d) $51.0 million in proceeds from notes payable,offset by (a) $300.0 million used to repay the asset based credit facility, (b) $22.7 million used to pay cash dividends, (c) $51.7million used to repay other notes payable, (d) $1.1 million distributions to noncontrolling interests, (e) $7.3 million used fordebt issuance costs, (f) $18.7 million used to repurchase common stock, and (g) $3.7 million used for the payment of employmenttaxes on vesting of restricted stock.
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Credit Agreements
OnApril 21, 2017, we amended the asset based credit facility agreement (as amended, the “Credit Agreement”) with WellsFargo Bank to increase the maximum borrowing limit from $100.0 million to $200.0 million. Such amendment, among other things, alsoextended the expiration date of the credit facility from July 15, 2018 to April 21, 2022. The Credit Agreement continues to allowfor borrowings under a separate credit agreement (a “UK Credit Agreement”) dated March 19, 2015 with an affiliate ofWells Fargo Bank which provides for the financing of transactions in the United Kingdom with borrowings up to 50.0 million BritishPounds. Any borrowing on the UK Credit Agreement reduces the availability of the asset based $200.0 million credit facility. TheUK Credit Agreement is cross collateralized and integrated in certain respects with the Credit Agreement. The Credit Agreementcontinues to include the addition of our Canadian subsidiary, from the October 5, 2016 amendment to the Credit Agreement, to facilitateborrowings to fund retail liquidation transactions in Canada. From time to time, we utilize this credit facility to fund costsand expenses incurred in connection with liquidation engagements. We also utilize this credit facility in order to issue lettersof credit in connection with liquidation engagements conducted on a guaranteed basis. Subject to certain limitations and offsets,we are permitted to borrow up to $200.0 million under the credit facility, less the aggregate principal amount borrowed under theUK Credit Agreement (if in effect). Borrowings under the credit facility are only made at the discretion of the lender and aregenerally required to be repaid within 180 days. The interest rate for each revolving credit advance under the related credit agreementis, subject to certain terms and conditions, equal to the LIBOR plus a margin of 2.25% to 3.25% depending on the type of advanceand the percentage such advance represents of the related transaction for which such advance is provided. The credit facility issecured by the proceeds received for services rendered in connection with the liquidation service contracts pursuant to which anyoutstanding loan or letters of credit are issued and the assets that are sold at liquidation related to such contract, if any.The credit facility also provides for success fees in the amount of 2.5% to 17.5% of the net profits, if any, earned on liquidationengagements that are financed under the credit facility as set forth in the related credit agreement. We typically seek borrowingson an engagement-by-engagement basis. The Credit Agreement contains certain covenants, including covenants that limit or restrictour ability to incur liens, incur indebtedness, make investments, dispose of assets, make certain restricted payments, merge orconsolidate and enter into certain transactions with affiliates. There was no outstanding balanceon this credit facility at December 31, 2020. The outstanding balance on this credit facility was $37.1 million at December 31,2019. At December 31, 2020, there were no open letters of credit outstanding. We are in compliance with all financial covenantsin the asset based credit facility at December 31, 2020.
OnDecember 19, 2018, BRPI Acquisition Co LLC (“BRPAC”), a Delaware limited liability company, UOL, and YMAX Corporation,Delaware corporations (collectively, the “Borrowers”), indirect wholly owned subsidiaries of the Company, in the capacityof borrowers, entered into a credit agreement with Banc of California, N.A. in the capacity as agent and lender and with the otherlenders party thereto (the “BRPAC Credit Agreement”). Under the BRPAC Credit Agreement, we borrowed $80.0 million dueDecember 19, 2023. Pursuant to the terms of the BRPAC Credit Agreement, we may request additional optional term loans in an aggregateprincipal amount of up to $10.0 million at any time prior to the first anniversary of the agreement date. On February 1, 2019,the Borrowers entered into the First Amendment to Credit Agreement and Joinder with City National Bank as a new lender in whichthe new lender extended to Borrowers the additional $10.0 million.
On December 31, 2020,the Borrowers, the Secured Guarantors, the Agent and the Lenders, entered into the Second Amendment to Credit Agreement (the “SecondAmendment”) pursuant to which, among other things, (i) the Lenders agreed to make a new $75.0 million term loan to the Borrowers,the proceeds of which the Borrowers’ will use to repay the outstanding principal amount of the existing Terms Loans and OptionalLoans and for other general corporate purposes, (ii) the Borrowers were permitted to make a one-time Permitted Distribution (asdefined in the Second Amendment) in the amount of $30.0 million on the date of the Second Amendment, (iii) the maturity date ofthe new Term Loans is five (5) years from the date of the Second Amendment, (iv) the interest rate margin was increased by 25 basispoints as set forth in the Second Amendment, (v) the Borrowers agreed to make mandatory prepayments of the Term Loans from a portionof the Consolidated Excess Cash Flow (as defined in the Credit Agreement), (vi) the maximum Consolidated Total Funded Debt Ratio(as defined in the Credit Agreement) was increased as set forth in the Second Amendment and (vii) the Company and B. Riley PrincipalInvestments, LLC entered into a reaffirmation of their guarantees of the Borrowers’ obligations under the Credit Agreement.Additionally, the Borrowers paid a commitment fee and an arrangement fee, each based on a percentage of the aggregate commitments,in each case upon the closing of the Second Amendment, as further discussed in Note 11 to the accompanying financial statements.The borrowings under the amended BRPAC Credit Agreement bear interest equal to the LIBOR plus a margin of 2.75% to 3.25% dependingon the Borrowers’ consolidated total funded debt ratio as defined in the BRPAC Credit Agreement. At December 31, 2020, theinterest rate on the BRPAC Credit Agreement was at 3.40%.
Amounts outstandingunder the Amended BRPAC Credit Agreement are due in quarterly installments commencing on March 31, 2021. Quarterly installmentsfrom March 31, 2021 to December 31, 2021 are in the amount of $4.8 million per quarter, from March 31, 2022 to December 31, 2022are in the amount of $4.3 million per quarter, from March 31, 2023 to December 31, 2023 are in the amount of $3.8 million per quarter,from March 31, 2024 to December 31, 2024 are in the amount of $3.3 million per quarter, and from March 31, 2025 to December 31,2025 are $2.8 million per quarter.
As of December 31, 2020,and 2019, the outstanding balance on the term loan was $74.2 million (net of unamortized debt issuance costs of $0.8 million) and$66.7 million (net of unamortized debt issuance costs of $0.6 million), respectively.
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We are in compliancewith all financial covenants in the BRPAC Credit Agreement at December 31, 2020.
Preferred Stock Offering
On October 7, 2019,the Company closed its public offering of depositary shares, each representing 1/1000 th of a share of Series A PreferredStock. The liquidation preference of each share of Series A Preferred Stock is $25,000 ($25.00 per Depositary Share). At the closing,the Company issued 2,000 shares of Series A Preferred Stock represented by 2,000,000 Depositary Shares issued. On October 11, 2019,the Company completed the sale of an additional 300,000 Depositary Shares, pursuant to the underwriters’ full exercise oftheir over-allotment option to purchase additional Depositary Shares. The offering of the 2,300,000 Depository Shares generated$57,500 of gross proceeds.
On September 4, 2020,the Company closed its public offering of Depositary Shares, each representing 1/1000th of a share of 7.375% Series B CumulativePerpetual Preferred Stock. The liquidation preference of each share of Series A Preferred Stock is $25,000 ($25.00 per DepositaryShare). As a result of the offering the Company issued 1,300 shares of Series B Preferred Stock represented by 1,300,000 depositaryshares. The offering resulted in gross proceeds of approximately $32.5 million.
Senior Note Offerings
During the year endedDecember 31, 2020, we issued $54.5 million of senior notes due with maturities dates ranging from May 2023 to December 2027 pursuantto At the Market Issuance Sales Agreements with B. Riley Securities, which governs the program of at-the-market sales of our seniornotes. We filed a series of prospectus supplements with the SEC which allowed us to sell these senior notes.
On February 12, 2020,we issued $132.3 million of senior notes due in February 2025 (“6.375% 2025 Notes”) pursuant to the prospectus supplementdated February 10, 2020. Interest on the 6.375% 2025 Notes is payable quarterly at 6.375%. The 6.375% 2025 Notes are unsecuredand due and payable in full on February 28, 2025. In connection with the issuance of the 6.375% 2025 Notes, we received net proceedsof $129.2 million (after underwriting commissions, fees and other issuance costs of $3.0 million). We currently anticipate usingthe net proceeds from the 6.375% 2025 notes for general corporate purposes, including funding future acquisitions and investments,repaying indebtedness, making capital expenditures and funding working capital.
During March 2020, werepurchased bonds with an aggregate face value of $3.4 million for $1.8 million resulting in a gain net of expenses of $1.6 millionas of December 31, 2020. As part of the repurchase, we paid $30 thousand in interest accrued through the date of each respectiverepurchase.
At December 31, 2020and December 31, 2019, the total senior notes outstanding was $870.8 million (net of unamortized debt issue costs of $9.6 million)and $688.1 million (net of unamortized debt issue costs of $8.9 million) with a weighted average interest rate of 6.95% and 7.05%,respectively. Interest on senior notes is payable on a quarterly basis. Interest expenseon senior notes totaled $61.2 million, $43.8 million and $25.4 million for the three years ended December 31, 2020, 2019 and 2018,respectively.
OnJanuary 25, 2021, the Company issued $230.0 million of senior notes due in January 2028 (“6.0% 2028 Notes”) pursuantto the prospectus supplement dated February 12, 2020. Interest on the 6.0% 2028 Notes is payable quarterly at 6.0%. The 6.0% 2028Notes are unsecured and due and payable in full on January 31, 2028 .In connection with the issuance of the 6.0% 2028 Notes, the Company received net proceeds of $225.7 million (after underwritingcommissions, fees and other issuance costs of $4.2 million). The Notes bear interest at the rate of 6.0% per annum.
On March 1, 2021,the Company announced its intention to redeem at par, and at its option, $128.2 million of senior notes due in February 2027 (“7.50%2027 Notes”) on March 31, 2021 pursuant to the second supplemental indenture dated May 31, 2017. The total redemption paymentwill include approximately $1.6 million in accrued interest.
On February 14, 2020,we entered into a new At Market Issuance Sales Agreement (the “February 2020 Sales Agreement”) with B. Riley Securitiesgoverning a program of at-the-market sales of certain of our senior notes. The most recent sales agreement prospectus was filedby us with the SEC on January 28, 2021 (the “January 2021 Sales Agreement Prospectus”). The Sales Agreement Prospectusallows us to sell up to $150.0 million of certain of our senior notes pursuant to an effective Registration Statement on Form S-3.As of December 31, 2020, we had $132.7 million remaining availability under the February 2020 Sales Agreement.
Off Balance Sheet Arrangements
As part of our investmentbanking and financial services activities, from time to time we enter into guaranties of debt, commitments of other entities, andsimilar transactions that may be considered off-balance sheet arrangements.
B&W CreditAgreement and Backstop
On January 31, 2020,the Company provided Babcock & Wilcox Enterprises, Inc. (“B&W”) $30 million of additional Tranche A-4 lastout term loans pursuant to Amendment No. 20 (“Amendment No. 20”) to the Credit Agreement, dated May 11, 2015 (as amendedto date, the “B&W Credit Agreement”) with Bank of America, N.A., as administrative agent and lender, and the otherlenders party thereto. The Company is a lender with respect to B&W’s existing last out term loans under the Credit Agreement.Kenneth Young, our President, is the Chief Executive Officer of B&W. Pursuant to Amendment No. 20, B&W and the lenders,including the Company, also agreed upon a term sheet pursuant to which B&W would undertake a refinancing transaction on orprior to May 11, 2020 (the “Refinancing”) and B&W and the lenders, including the Company, would amend and restatethe Credit Agreement on the terms specified therein. On January 31, 2020, B&W also entered into a letter agreement with theCompany (the “Backstop Commitment Letter”) pursuant to which the Company agreed to fund any shortfall in the $200million of new debt or equity financing required as part of the terms of the Refinancing to the extent such amounts have not beenraised from third parties on the same terms contemplated by the Refinancing. On May 14, 2020, the Company provided B&W withanother $30,000 of last-out term loans pursuant to a further amendments to B&W’s credit agreement, which also includedfuture commitments for the Company to loan B&W $40.0 million on various dates starting in November 2020 and a limited guarantyby the Company of B&W’s obligations under the amended credit facility.
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On August 10, 2020,the Company entered into a project specific indemnity rider (the “Indemnity Rider”) in favor of Berkley Insurance Companyand/or Berkley Regional Insurance Company (collectively, “Berkley”) to a general agreement of indemnity made by B&Win favor of Berkley (the Indemnity Agreement”). Pursuant to the Indemnity Rider, the Company agreed to indemnify Berkleyin connection with a default by B&W under the Indemnity Agreement relating to a $30.0 million payment and performance bondissued by Berkley in connection with a construction project undertaken by B&W. In consideration for providing the IndemnityRider, B&W paid the Company $0.6 million on August 26, 2020.
Franchise GroupCommitments and Loan Participant Guaranty
PSP Commitment
On January 23, 2021,we committed up to $400.0 million aggregate principal amount of unsecured debt financing, consisting of $100.0 million of secureddebt financing, and $300.0 million of unsecured debt financing, to affiliates of Franchise Group, Inc. (collectively, “FRG”)in connection with FRG’s acquisition of Pet Supplies Plus (“PSP”). We are in the process of arranging financingfor FRG’s PSP acquisition and to the extent needed we will fund any shortfall in the debt financing up to the $400.0 millioncommitment.
The Loan ParticipantGuaranty
On February 14, 2020FRG, the lenders from time to time party thereto and GACP Finance as administrative agent, entered into a Credit Agreement (the“Term Loan Credit Agreement”), pursuant to which the lenders provided a term loan facility to FRG in an aggregate principalamount of $575.0 million.
On February 19, 2020,the Company entered into a limited guaranty (the “Loan Participant Guaranty”) to one of the lenders under the TermLoan Credit Agreement (the “Loan Participant”) pursuant to which the Company guaranteed the payment when due of certainobligations, including principal, interest, and other amounts payable to the Loan Participant under the Term Loan Credit Agreementin an amount not to exceed $50.0 million plus certain expenses of the Loan Participant and certain protective advances relatedto such guaranteed obligations (the “Loan Participant Guaranteed Obligations”). The Loan Participant may require paymentof the Loan Participant Guaranteed Obligations by the Company upon the occurrence of certain guarantor events of default, includingpayment or bankruptcy events of default, in each case pursuant to the Term Loan Credit Agreement. The Loan Participant Guarantyremains in effect until the date that the Loan Participant Guaranteed Obligations have been paid in full.
The Loan ParticipantGuaranteed Obligations are unsecured obligations of the Company and rank equally in right of payment with all of the Company’sother existing and future unsecured and unsubordinated indebtedness. The Loan Participant Guaranteed Obligations are effectivelysubordinated in right of payment to all of the Company’s existing and future secured indebtedness and structurally subordinatedto all existing and future indebtedness of the Company’s subsidiaries, including trade payables.
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B. Riley PrincipalMerger Corp. II LOI Backstop Commitment
B. Riley Principal MergerCorp. II (“BRPM II”) was formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stockpurchase, reorganization or similar business combination with one or more businesses. BRPM II entered into an agreement and planof merger (the “Merger Agreement”) to acquire Eos Energy Storage LLC, a Delaware limited liability company, a privatelyheld company that is not related to the Company (the “Acquisition”). In order to help meet the condition under theMerger Agreement that BRPM II maintain a certain level of cash available upon the closing (before taking into account certain transactionexpenses), the Company entered into an Equity Commitment Letter with BRPM II and B. Riley Principal Sponsor Co. II, LLC, pursuantto which the Company committed to provide up to $40.0 million in equity financing at closing, less the number of shares of BRPMII’s common stock already issued pursuant to subscription agreements entered into with investors prior to the closing. TheAcquisition closed on November 17, 2020 and the Company’s equity commitment thereby terminated.
Except as disclosedabove, we have no material obligations, assets or liabilities which would be considered off-balance sheet arrangements and do notparticipate in transactions that create relationships with unconsolidated entities or financial partnerships, often referred toas variable interest entities, established for the purpose of facilitating off-balance sheet arrangements.
Other Commitment
On June 19, 2020,the Company participated in a loan facility agreement to provide a total loan commitment up to 33,000 EUROS to a retailer in Europe. The Company made an initial funding of 6,600 EUROS in July 2020. No additional borrowings have been made since the initial funding,leaving unused future commitments available of up to 26,400 EUROS as of December 31, 2020.
Dividends
From time to time,we may decide to pay dividends which will be dependent upon our financial condition and results of operations. On February 25,2021, the Board of Directors announced an increase to the regular quarterly dividend from $0.375 per share to $0.50 per share.On February 25, 2021, the Company declared a regular quarterly dividend of $0.50 per share and a special dividend of $3.00 pershare, which will be paid on or about March 24, 2021 to stockholders of record as of March 10, 2021. During the years ended December31, 2020 and 2019, we paid cash dividends on our common stock of $38.8 million and $41.1 million, respectively. On October 28,2020, the Board of Directors announced an increase to the regular quarterly dividend from $0.30 per share to $0.375 per share.On October 28, 2020, the Company declared a regular quarterly dividend of $0.375 per share, which was paid on November 24, 2020to stockholders of record as of November 10, 2020. On July 30, 2020, the Board of Directors announced an increase to the regularquarterly dividend from $0.25 per share to $0.30 per share. On July 30, 2020, the Company declared a regular quarterly dividendof $0.30 per share and a special dividend of $0.05 per share which was paid on August 28, 2020 to stockholders of record as ofAugust 14, 2020. On May 8, 2020, we declared a quarterly dividend of $0.25 per share which was paid on June 10, 2020 to stockholdersof record as of June 1, 2020. On March 3, 2020, the Board of Directors announced an increase to the regular quarterly dividendfrom $0.175 per share to $0.25 per share. While it is the Board’s current intention to make regular dividend payments of$0.50 per share each quarter and special dividend payments dependent upon exceptional circumstances from time to time, our Boardof Directors may reduce or discontinue the payment of dividends at any time for any reason it deems relevant. The declaration andpayment of any future dividends or repurchases of our common stock will be made at the discretion of our Board of Directors andwill be dependent upon our financial condition, results of operations, cash flows, capital expenditures, and other factors thatmay be deemed relevant by our Board of Directors.
A summary of our commonstock dividend activity for the years ended December 31, 2020 and 2019 was as follows:
| Date Declared |
|
Date Paid |
|
Stockholder
Record Date |
|
Regular
Dividend Amount |
|
|
Special
Dividend Amount |
|
|
Total
Dividend Amount |
|
|||
| October 28, 2020 | November 24, 2020 | November 10, 2020 | $ | 0.375 | $ | 0.000 | $ | 0.375 | ||||||||
| July 30, 2020 | August 28, 2020 | August 14, 2020 | 0.300 | 0.050 | 0.350 | |||||||||||
| May 8, 2020 | June 10, 2020 | June 1, 2020 | 0.250 | 0.000 | 0.250 | |||||||||||
| March 3, 2020 | March 31, 2020 | March 17, 2020 | 0.250 | 0.100 | 0.350 | |||||||||||
| October 30, 2019 | November 26, 2019 | November 14, 2019 | 0.175 | 0.475 | 0.650 | |||||||||||
| August 1, 2019 | August 29, 2019 | August 15, 2019 | 0.175 | 0.325 | 0.500 | |||||||||||
| May 1, 2019 | May 29, 2019 | May 15, 2019 | 0.080 | 0.180 | 0.260 | |||||||||||
| March 5, 2019 | March 26, 2019 | March 19, 2019 | 0.080 | 0.000 | 0.080 | |||||||||||
Holders of Series A Preferred Stock, when and as authorizedby the board of directors of the Company, are entitled to cumulative cash dividends at the rate of 6.875% per annum of the $25,000liquidation preference ($25.00 per Depositary Share) per year (equivalent to $1,718.75 or $1.71875 per Depositary Share). Dividendswill be payable quarterly in arrears, on or about the last day of January, April, July and October. On January 9, 2020, theCompany declared a cash dividend of $0.4296875 per Depositary Share, which was paid on January 31, 2020 to holdersof record as of the close of business on January 21, 2020. On April 13, 2020, the Company declared a cash dividend of$0.4296875 per Depositary Share, which was paid on April 30, 2020 to holders of record as of the close of business on April 23,2020. On July 7, 2020, the Company declared a cash dividend of $0.4296875 per Depositary Share, which was paid on July 31, 2020to holders of record as of the close of business on July 21, 2020. On October 8, 2020, the Company declared a cash dividendof $0.4296875 per Depositary Share, which was paid on October 31, 2020 to holders of record as of the close of business on October21, 2020. On January 11, 2021, the Company declared a cash dividend of $0.4296875 per Depositary Share, which was paid onJanuary 29, 2021 to holders of record as of the close of business on January 21, 2021.
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Holders of Series B Preferred Stock, when and as authorizedby the board of directors of the Company, are entitled to cumulative cash dividends at the rate of 7.375% per annum of the $25,000liquidation preference ($25.00 per Depositary Share) per year (equivalent to $1,843.75 or $1.84375 per Depositary Share). Dividendswill be payable quarterly in arrears, on or about the last day of January, April, July and October. On October 8, 2020, theCompany declared a cash dividend of $0.29193 per Depositary Share, which was paid on October 31, 2020 to holders of record as ofthe close of business on October 21, 2020. On January 11, 2021, the Company declared a cash dividend of $0.4609375 per DepositaryShare, which was paid on January 29, 2021 to holders of record as of the close of business on January 21, 2021.
Contractual Obligations
The following tablesets forth aggregate information about our contractual obligations as of December 31, 2020 and the periods in which payments aredue:
| Payments due by period | ||||||||||||||||||||
| Total |
Less Than
One Year |
1-3 Years | 4-5 Years |
More Than
5 years |
||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
| Contractual Obligations | ||||||||||||||||||||
| Operating lease obligations | $ | 73,688 | $ | 11,775 | $ | 21,340 | $ | 19,492 | $ | 21,081 | ||||||||||
| Notes payable | 38,272 | 37,896 | 376 | — | — | |||||||||||||||
| Term loan | 75,000 | 19,000 | 32,000 | 24,000 | — | |||||||||||||||
| Senior notes payable, including interest | 1,091,760 | 47,197 | 340,993 | 294,283 | 409,287 | |||||||||||||||
| Total | $ | 1,278,720 | $ | 115,868 | $ | 394,709 | $ | 337,775 | $ | 430,368 | ||||||||||
We anticipate thatcash generated from operations and existing borrowing arrangements under our credit facility to fund costs and expenses incurredin connection with liquidation engagements should be sufficient to meet our cash requirements for at least the next twelve months.However, our future capital requirements will depend on many factors, including the success of our businesses in generating cashfrom operations, continued compliance with financial covenants contained in our credit facility, the timing of principal paymentson our long-term debt and the Capital Markets in general, among other factors.
Critical Accounting Policies
Our financial statementsand the notes thereto contain information that is pertinent to management’s discussion and analysis. The preparation of financialstatements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requiresmanagement to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingentassets and liabilities. Management bases its estimates on historical experience and on various other assumptions that are believedto be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values ofassets and liabilities that are not readily apparent from other sources. On a continual basis, management reviews its estimatesutilizing currently available information, changes in facts and circumstances, historical experience and reasonable assumptions.After such reviews, and if deemed appropriate, management’s estimates are adjusted accordingly. Actual results may vary fromthese estimates and assumptions under different and/or future circumstances. Management considers an accounting estimate to becritical if:
| ● | it requires assumptions to be made thatwere uncertain at the time the estimate was made; and |
| ● | changes in the estimate, or the use ofdifferent estimating methods that could have been selected, could have a material impact on results of operations or financialcondition. |
Use of Estimates. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affectthe reported amounts of assets, liabilities and disclosures of contingent assets and liabilities at the date of the financial statementsand the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.Estimates are used when accounting for certain items such as valuation of securities, reserves for accounts receivable, the carryingvalue of intangible assets and goodwill, the fair value of mandatorily redeemable noncontrolling interests and accounting for incometax valuation allowances, recovery of contract assets and sales returns and allowances. Estimates are based on historical experience,where applicable, and assumptions that management believes are reasonable under the circumstances. Due to the inherent uncertaintyinvolved with estimates, actual results may differ.
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On January 30, 2020,the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus (the“COVID-19 outbreak”). In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increasein exposure globally. Coming into 2021, the full impact of the COVID-19 outbreak continues to evolve, as countries across the worldmanage repeated waves of the pandemic and vaccines come to market. The impact of the COVID-19 outbreak on the Company’s resultsof operations, financial position and cash flows will depend on future developments, including the duration and spread of the outbreakand related advisories and restrictions and the success of vaccines in slowing or halting the pandemic. These developments andthe impact of the COVID-19 outbreak on the financial markets and the overall economy continue to be highly uncertain and cannotbe predicted. If the financial markets and/or the overall economy continue to be impacted, the Company’s results of operations,financial position and cash flows may be materially adversely affected.
Our significant accountingpolicies are described in Note 2 to the consolidated financial statements included elsewhere in this Annual Report. Managementbelieves that the following critical accounting policies reflect the more significant estimates and assumptions used in the preparationof our financial statements.
Revenue Recognition. On January 1, 2018, we adopted Accounting Standards Codification (“ASC”) 606 – Revenue from Contracts withCustomers using the modified retrospective method and the impact was determined to be immaterial on our consolidated financialstatements. The new revenue standard was applied prospectively in our consolidated financial statements from January 1, 2018 forwardand reported financial information for historical comparable periods will not be revised and will continue to be reported underthe accounting standards in effect during those historical periods.
Revenues are recognizedwhen control of the promised goods or performance obligations for services is transferred to our customers, in an amount that reflectsthe consideration we expect to be entitled to in exchange for the goods or services.
Revenues from contractswith customers in the Capital Markets segment, Auction and Liquidation segment, Financial Consulting segment, Principal Investments– United Online and magicJack segment and Brands segment are primarily comprised of the following:
Capital MarketsSegment - Fees earned from corporate finance and investment banking services are derived from debt, equity and convertiblesecurities offerings in which the Company acted as an underwriter or placement agent. Fees from underwriting activities are recognizedas revenues when the performance obligation for the services related to the underwriting transaction is satisfied under the termsof the engagement and is not subject to any other contingencies. Fees are also earned from financial advisory and consulting servicesrendered in connection with client mergers, acquisitions, restructurings, recapitalizations and other strategic transactions. Theperformance obligation for financial advisory services is satisfied over time as work progresses on the engagement and servicesare delivered to the client. The performance obligation for financial advisory services may also include success and performancebased fees which are recognized as revenue when the performance obligation is no longer constrained and it is not probable thatthe revenue recognized would be subject to significant reversal in a future period. Generally, it is probable that the revenuerecognized is no longer subject to significant reversal upon the closing of the investment banking transaction.
Fees from wealth andasset management services consist primarily of investment management fees that are recognized over the period the performance obligationfor the services are provided. Investment management fees are primarily comprised of fees for investment management services andare generally based on the dollar amount of the assets being managed.
Revenues from salesand trading are recognized when the performance obligation is satisfied and include commissions resulting from equity securitiestransactions executed as agent or principal and are recorded on a trade date basis and fees paid for equity research.
Revenues from othersources in the Capital Markets segment is primarily comprised of (i) interest income from loans receivable and securities lendingactivities, (ii) related net trading gains and losses from market making activities, the commitment of capital to facilitate customerorders, (iii) trading activities from our Principal Investments in equity and other securities for the Company’s account,and (iv) other income.
Interest income fromsecurities lending activities consists of interest income from equity and fixed income securities that are borrowed from one partyand loaned to another. The Company maintains relationships with a broad group of banks and broker-dealers to facilitate the sourcing,borrowing and lending of equity and fixed income securities in a “matched book” to limit the Company’s exposureto fluctuations in the market value or securities borrowed and securities loaned.
Other revenues include(i) net trading gains and losses from market making activities in our fixed income group, (ii) carried interest from our assetmanagement recognized as earnings from financial assets within the scopeof ASC 323 - Investments - Equity Method and Joint Ventures , and therefore will not be in the scope of ASC 606 - Revenuefrom Contracts with Customers . In accordance with ASC 323 - Investments- Equity Method and Joint Ventures , the Company will record equity method income (losses) as a component of investment incomebased on the change in our proportionate claim on net assets of the investment fund, including performance-based capital allocations,assuming the investment fund was liquidated as of each reporting date pursuant to each fund’s governing agreements, and (iii)other miscellaneous income.
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Auction and Liquidationsegment - Commission and fees earned on the sale of goods at Auction and Liquidation sales are recognized when evidence ofa contract or arrangement exists, the transaction price has been determined, and the performance obligation has been satisfiedwhen control of the product and risks of ownership has been transferred to the buyer. The commission and fees earned for theseservices are included in revenues in the accompanying consolidated statements of income. Under these types of arrangements, revenuesalso include contractual reimbursable costs.
Revenues earned fromAuction and Liquidation services contracts where the Company guarantees a minimum recovery value for goods being sold at auctionor liquidation are recognized over time when the performance obligation is satisfied. We generally use the cost-to-cost measureof progress for our contracts because it best depicts the transfer of services to the customer which occurs as we incur costs onour contracts. Under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratioof costs incurred to date to the total estimated costs at completion of the performance obligation. Revenues, including estimatedfees or profits, are recorded proportionally as costs are incurred. Costs to fulfill the contract include labor and other directcosts incurred by the Company related to the contract. Due to the nature of the guarantees and performance obligations under thesecontracts, the estimation of revenue that is ultimately earned is complex and subject to many variables and requires significantjudgment. It is common for these contracts to contain provisions that can either increase or decrease the transaction price uponcompletion of our performance obligations under the contract. Estimated amounts are included in the transaction price at the mostlikely amount it is probable that a significant reversal of revenue will not occur. Our estimates of variable consideration anddetermination of whether or not to include estimated amounts in the transaction price are based on an assessment of our anticipatedperformance under the contract taking into consideration all historical, current and forecasted information that is reasonablyavailable to us. Costs that directly relate to the contract and expected to be recoverable are capitalized as an asset and includedin advances against customer contracts in the accompanying consolidated balance sheets. These costs are amortized as the servicesare transferred to the customer over the contract period, which generally does not exceed six months, and the expense is recognizedas a component of direct cost of services. If, during the auction or liquidation sale, the Company determines that the total coststo be incurred on a performance obligation under a contract exceeds the total estimated revenues to be earned, a provision forthe entire loss on the performance obligation is recognized in the period the loss is determined.
If the Company determinesthat the variable consideration used in the initial determination of the transaction price for the contract is such that the totalrecoveries from the auction or liquidation will not exceed the guaranteed recovery values or advances made in accordance with thecontract, the transaction price will be reduced and a loss or negative revenue could result from the performance obligation. Aprovision for the entire loss as negative revenue on the performance obligation is recognized in the period the loss is determined.
Financial ConsultingSegment - Revenues in the Financial Consulting segment are primarily comprised of fees earned from providing bankruptcy, financialadvisory, forensic accounting, real estate consulting and valuation and appraisal services. Fees earned from bankruptcy, financialadvisory, forensic accounting and real estate consulting services are rendered to clients over time as work progresses on the engagementand services are delivered to the client. Fees may also include success and performance based fees which are recognized as revenuewhen the performance obligation is no longer constrained and it is not probable that the revenue recognized would be subject tosignificant reversal in a future period. Revenues for valuation and appraisal services are recognized when the performance obligationis completed and is generally at the point in time upon delivery of the report to the customer. Revenues in the Financial Consultingsegment also include contractual reimbursable costs.
Principal Investments– United Online and magicJack Segment –Revenues in the Principal Investments - United Online and magicJack segmentare primarily comprised of services revenue from fees charged to United Online pay accounts; sales revenue from the sale of themagicJack and related devices and access rights; revenues from access rights renewals and mobile apps; prepaid minutes revenues;revenues from access and wholesale charges; service revenue from UCaaS hosting services; advertising and other revenues; and productsrevenues from the sale of magicJack and mobile broadband service devices, including the related shipping and handling and installationfees, if applicable.
Service revenues fromfees charged to United Online pay accounts are recognized in the period in which fees are fixed or determinable and the relatedservices are provided to the customer. The Company’s pay accounts generally pay in advance for their services by credit card,PayPal, automated clearinghouse or check, and revenues are then recognized ratably over the service period. Advance payments frompay accounts are recorded in the consolidated balance sheets as deferred revenue. In circumstances where payment is not receivedin advance, revenues are only recognized if collectability is probably.
Revenues from salesof the magicJack devices and access rights represent revenues recognized from sales of the magicJack devices to retailers, wholesalers,or direct to customers, net of returns, over the period associated with the access right period. Revenues for the device and initialaccess right were accounted for as a combined unit of accounting and recognized ratably over the service term. The transactionprice for magicJack devices is allocated between equipment and service based on stand-alone selling prices. Revenues allocatedto equipment are recognized upon delivery (when control transfers to the customer), and service revenue is recognized ratably overthe service term. The Company estimates the return of direct sales as part of the transaction price using a six month rolling averageof historical returns. Revenues for hardware and shipping are recognized at the time of delivery and revenues for services arerecognized ratably over the service. The Company recognizes revenue for hardware based on delivery terms to the retailer and revenuefor service is deferred for the delay period and recognized ratably over the remaining access right period.
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Revenues from accessrights renewals and mobile apps represents revenues from customers purchasing rights to access our servers beyond the access rightperiod included in a magicJack device or magicJack service. The extended access right ranges from one to five years. These feescharged to customers are initially deferred and recognized as revenue ratably over the extended access right period. Revenues fromaccess rights granted to users of the magicJack Apps are recognized ratably over the access right period.
Revenues from thesale of other magicJack related products are revenues recognized from the sale of other items related to the magicJack devicesand access right renewals the Company offers its customers, including porting fees charged to customers to port their existingphone number to a magicJack device or services, fees charged for customer to select a custom, vanity or Canadian phone number andfees charged to customers to change their existing number. These revenues are recognized at the time of sale.
Prepaid minutes revenuesare primarily from the usage and expiration of international prepaid minutes, net of chargebacks. Revenues from prepaid minutesare recognized as minutes are used.
Revenues from accessand wholesale charges are generated from access fees charged to other telecommunication carriers or providers for InterexchangeCarriers (“IXC”) calls terminated to the Company’s end-users, and other fees charged to telecommunication carriersor providers for origination of calls to their 800-numbers. These revenues are recorded based on rates set forth in the respectivestate and federal tariffs or negotiated contract rates, less provisions for billing adjustments. Revenues from access and wholesalecharges are recognized as calls are terminated to the network.
UCaaS revenues arerecurring monthly service revenue from sales of its hosted services. Customers are billed monthly in advance for these recurringservices and in arrears for one time service charges and other certain usage charges. UCaaS revenues also includes non-recurringrevenue from the sale of hardware and network equipment. Revenues for recurring monthly service are recorded in the period theservices are provided over the term of the respective customer agreements and revenue from the sale of hardware and network equipmentis recognized in the period that the equipment is delivered and put into service.
Advertising revenuesconsist primarily of amounts from the Company’s Internet search partner that are generated as a result of users utilizingthe partner’s Internet search services and amounts generated from display advertisements. The Company recognizes such advertisingrevenues in the period in which the advertisement is displayed or, for performance-based arrangements, when the related performancecriteria are met. In determining whether an arrangement exists, the Company ensures that a written contract is in place, such asa standard insertion order or a customer-specific agreement. The Company assesses whether performance criteria have been met andwhether the fees are fixed or determinable based on a reconciliation of the performance criteria and the payment terms associatedwith the transaction. The reconciliation of the performance criteria generally includes a comparison of customer-provided performancedata to the contractual performance obligation and to internal or third-party performance data in circumstances where that datais available.
Brands Segment –Licensing revenue results from various license agreements that provide revenue based on guaranteed minimum royalty amounts andadvertising/marketing fees with additional royalty revenue based on a percentage of defined sales. Guaranteed minimum royalty amountsare recognized as revenue on a straight-line basis over the full contract term. Royalty payments exceeding the guaranteed minimumamounts in a specific contract year are recognized only subsequent to when the guaranteed minimum amount has been achieved. Otherlicensing fees are recognized at a point in time once the performance obligations have been satisfied.
Payments receivedas consideration for the grant of a license are recorded as deferred revenue at the time payment is received and recognized ratablyas revenue over the term of the license agreement. Advanced royalty payments are recorded as deferred revenue at the time paymentis received and recognized as revenue when earned. Revenue is not recognized unless collectability is probable.
Allowance forDoubtful Accounts. We maintain an allowance for doubtful accounts for estimated losses inherent in our accounts receivableportfolio. In establishing the required allowance, management utilizes the expected loss model. Management also considers historicallosses adjusted for current market conditions and the customers’ financial condition, the amount of receivables in dispute,and the current receivables aging and current payment patterns. Account balances are charged off against the allowance after allmeans of collection have been exhausted and the potential for recovery is considered remote. The bad debt expense is included asa component of selling, general and administrative expenses in the accompanying consolidated statements of income.
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Goodwill andOther Intangible Assets. We account for goodwill and intangible assets in accordance with the accounting guidance whichrequires that goodwill and other intangibles with indefinite lives be tested for impairment annually or on an interim basis ifevents or circumstances indicate that the fair value of an asset has decreased below its carrying value.
Goodwill includesthe excess of the purchase price over the fair value of net assets acquired in business combinations and the acquisition of noncontrollinginterests. The Codification requires that goodwill be tested for impairment at the reporting unit level (operating segment or onelevel below an operating segment). Application of the goodwill impairment test requires judgment, including the identificationof reporting units, assigning assets and liabilities to reporting units, assigning goodwill to reporting units, and determiningthe fair value. The Company operates five reporting units, which are the same as its reporting segments described in Note 22 tothe consolidated financial statements. Significant judgment is required to estimate the fair value of reporting units which includesestimating future cash flows, determining appropriate discount rates and other assumptions. Changes in these estimates and assumptionscould materially affect the determination of fair value and/or goodwill impairment.
When testing goodwillfor impairment, in accordance with ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,the Company made a qualitative assessment of the impact of the COVID-19 outbreak on goodwill and other intangible assets. Basedon the Company’s qualitative assessments during 2020, the Company concluded that a positive assertion can be made from thequalitative assessment that it is more likely than not that the fair value of the reporting units exceeded their carrying valuesand no impairments were identified.
The Company reviewsthe carrying value of its amortizable intangibles and other long-lived assets for impairment at least annually or whenever eventsor changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-livedassets is measured by comparing the carrying amount of the asset or asset group to the undiscounted cash flows that the asset orasset group is expected to generate. If the undiscounted cash flows of such assets are less than the carrying amount, the impairmentto be recognized is measured by the amount by which the carrying amount of the asset or asset group, if any, exceeds its fair marketvalue. During the year ended December 31, 2020, the Company determined that the COVID-19 outbreak was a triggering event for testingthe indefinite-lived tradenames in the Brands segment during the first quarter and again in the second quarter and determined thatthe indefinite-lived tradenames in the Brands segment were impaired. As a result, the Company recognized impairment charges of$12,500, during the year ended December 31, 2020, which are included in restructuring charge in the Company’s consolidatedstatements of income. During the year ended December 31, 2019, the Company recognized no impairment of intangibles.
Fair Value Measurements. The Company records securities and other investments owned, securities sold not yet purchased, and mandatorily redeemable noncontrollinginterests that were issued after November 5, 2003 at fair value with fair value determined in accordance with the Codification.Our mandatorily redeemable noncontrolling interests are measured at fair value on a recurring basis and are categorized using thethree levels of fair value hierarchy. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) foridentical instruments that are highly liquid, observable and actively traded in over-the-counter markets. Fair values determinedby Level 2 inputs utilize inputs other than quoted prices included in Level 1 that are observable for the asset or liability, eitherdirectly or indirectly. Level 2 inputs include quoted prices for similar instruments in active markets, quoted prices for identicalor similar instruments in markets that are not active and model-derived valuations whose inputs are observable and can be corroboratedby market data. Level 3 inputs are unobservable inputs that are supported by little or no market activity and that are significantto the fair value of the assets or liabilities. In certain cases, the inputs used to measure fair value may fall into differentlevels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurementin its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement inits entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgmentand considers factors specific to the asset or liability.
The fair value of mandatorilyredeemable noncontrolling interests is determined based on the issuance of similar interests for cash, references to industry comparables,and relied, in part, on information obtained from appraisal reports and internal valuation models.
Investments in partnershipinterests include investments in private equity partnerships that primarily invest in equity securities, bonds, and direct lendingfunds. We also invest in priority investment funds and the underlying securities held by these funds are primarily corporate andasset-backed fixed income securities and restrictions exist on the redemption of amounts invested by the Company. The Company’spartnership and investment fund interests are valued based on the Company’s proportionate share of the net assets of thepartnerships and funds; the value for these investments are derived from the most recent statements received from the general partneror fund administrator. These partnership and investment fund interests are valued at net asset value (“NAV”) in accordancewith ASC “Topic 820: Fair Value Measurements .”
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The carrying amountsreported in the consolidated financial statements for cash, restricted cash, accounts receivable, accounts payable and accruedexpenses and other current liabilities approximate fair value based on the short-term maturity of these instruments. The carryingamounts of the notes payable (including credit lines used to finance liquidation engagements), long-term debt and capital leaseobligations approximate fair value because the contractual interest rates or effective yields of such instruments are consistentwith current market rates of interest for instruments of comparable credit risk.
Share-BasedCompensation. The Company’s share based payment awards principally consist of grants of restricted stock and restrictedstock units. Share based payment awards also include grants of membership interests in the Company’s majority owned subsidiaries.The grants of membership interests consist of percentage interests in the Company’s majority owned subsidiaries as determinedat the date of grant. In accordance with the accounting guidance share based payment awards are classified as either equity ora liability. For equity-classified awards, the Company measures compensation cost for the grant of membership interests at fairvalue on the date of grant and recognizes compensation expense in the consolidated statement of income over the requisite serviceor performance period the award is expected to vest.
In June 2018, theCompany adopted the 2018 Employee Stock Purchase Plan (“Purchase Plan”) which allows eligible employees to purchasecommon stock through payroll deductions at a price that is 85% of the market value of the common stock on the last day of the offeringperiod. In accordance with the provisions of ASC 718, “Compensation – Stock Compensation” (“ASC 718”),the Company is required to recognize compensation expense relating to shares offered under the Purchase Plan.
Income Taxes. The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been includedin the financial statements or tax returns. Deferred tax liabilities and assets are determined based on the difference betweenthe financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differencesare expected to reverse. The Company estimates the degree to which tax assets and credit carryforwards will result in a benefitbased on expected profitability by tax jurisdiction, the eligible carryforward period, and other circumstances. A valuation allowancefor such tax assets and loss carryforwards is provided when it is determined to be more likely than not that the benefit of suchdeferred tax asset will not be realized in future periods. Tax benefits of operating loss carryforwards are evaluated on an ongoingbasis, including a review of historical and projected future operating results, the eligible carryforward period, and other circumstances.If it becomes more likely than not that a tax asset will be used, the related valuation allowance on such assets would be reduced.
The Company establishesa valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of thedeferred tax assets will not be realized. Tax benefits of operating loss and tax credit carryforwards are evaluated on an ongoingbasis, including a review of historical and projected future operating results, the eligible carryforward period, and other circumstances.As a result of the common stock offering that was completed on June 5, 2014, the Company had a more than 50% ownership shift inaccordance with Internal Revenue Code Section 382. Accordingly, the Company is limited to the amount of net operating loss thatmay be utilized in future taxable years depending on the Company’s actual taxable income. As of December 31, 2019, the Companybelieves that the net operating loss that existed as of the more than 50% ownership shift will be utilized in future tax periodsand it is more-likely-than-not that future taxable earnings will be sufficient to realize its deferred tax assets and has not providedan allowance.
Recent Accounting Standards
See Note 2(ab) tothe accompanying financial statements for recent accounting standards we have not yet adopted and recently adopted.
Item 7A. QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We periodically usederivative instruments, which primarily consist of the purchase of forward exchange contracts, for certain loans receivable andAuction and Liquidation engagements with operations outside the United States. During the year ended December 31, 2020, our useof derivatives consisted of the purchase of forward exchange contracts in the amount of 12,700 Euros, of which 6,700 Euros weresettled. As of December 31, 2020, forward exchange contracts in the amount of 6,000 Euros were outstanding. The Company did notuse any derivative contracts during the year ended December 31, 2019.
The forward exchangecontracts were entered into to improve the predictability of cash flows related to a retail store liquidation engagement and aloan receivable. The net loss from forward exchange contracts was $285 during the year ended December 31, 2020. This amount isreported as a component of selling, general and administrative expenses in the consolidated statements of income.
We transact business in various foreigncurrencies. In countries where the functional currency of the underlying operations has been determined to be the local country’scurrency, revenues and expenses of operations outside the United States are translated into United States dollars using averageexchange rates while assets and liabilities of operations outside the United States are translated into United States dollars usingperiod-end exchange rates. The effects of foreign currency translation adjustments are included in stockholders’ equity asa component of accumulated other comprehensive income in the accompanying consolidated balance sheets. Transaction (losses) gainswere ($639), ($238) and 1,294, during the years ended December 31, 2020, 2019 and 2018, respectively. These amounts are includedin selling, general and administrative expenses in our consolidated statements of income.
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Interest RateRisk
Our primary exposureto market risk consists of risk related to changes in interest rates. We utilize borrowings under our senior notes payable andcredit facilities to fund costs and expenses incurred in connection with our acquisitions and retail liquidation engagements. Borrowingsunder our senior notes payable are at fixed interest rates and borrowings under our credit facilities bear interest at a floatingrate of interest. In our portfolio of securities owned we invest in loans receivable that primarily bear interest at a floatingrate of interest.
The primary objectiveof our investment activities is to preserve capital for the purpose of funding operations while at the same time maximizing theincome we receive from investments without significantly increasing risk. To achieve these objectives, our investments allow usto maintain a portfolio of cash equivalents, short-term investments through a variety of securities owned that primarily includescommon stocks, loans receivable and investments in partnership interests. Our cash and cash equivalents through December 31, 2020included amounts in bank checking and liquid money market accounts. We may be exposed to interest rate risk through trading activitiesin convertible and fixed income securities as well as U.S. Treasury securities, however, based on our daily monitoring of thisrisk, we believe we currently have limited exposure to interest rate risk in these activities.
Foreign CurrencyRisk
The majority of ouroperating activities are conducted in U.S. dollars. Revenues generated from our foreign subsidiaries totaled $48.3 million forthe year ended December 31, 2020 or less than 5.3% of our totalrevenues of $902.8 million during the year ended December 31 , 2020.The financial statements of our foreign subsidiaries are translated into U.S. dollars at period-end rates, with the exception ofrevenues, costs and expenses, which are translated at average rates during the reporting period. We include gains and losses resultingfrom foreign currency transactions in income, while we exclude those resulting from translation of financial statements from incomeand include them as a component of accumulated other comprehensive income (loss). Transaction gains (losses), which were includedin our consolidated statements of income, amounted to a loss of $0.6 million and a loss of $0.2 million during the yearsended December 31, 2020 and 2019, respectively. We may be exposed to foreign currency risk; however, our operating resultsduring the year ended December 31, 2020 included $48.3 million of revenues from our foreign subsidiaries and a 10% appreciationof the U.S. dollar relative to the local currency exchange rates would result in less than $5.0 million increase in our operatingincome and a 10% depreciation of the U.S. dollar relative to the local currency exchange rates would have resulted in a net decreasein our operating income of less than $5.0 million for the year ended December 31 ,2020.
Item 8 . FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA
The information requiredby this Item 8 is submitted as a separate section beginning on page F-1 of this Annual Report on Form 10-K (the “FinancialStatements”).
Item 9. CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None .
Item 9A. CONTROLSAND PROCEDURES
Evaluation of Disclosure Controls andProcedures
We maintain a systemof disclosure controls and procedures (as defined in the Rules 13a-15(e) and 15(d)-15(e) under the Securities Exchange Act of 1934,as amended (the “Exchange Act”)) that is designed to ensure that information required to be disclosed in our ExchangeAct reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’srules and forms, and that such information is accumulated and communicated to our management, including our Co-Chief ExecutiveOfficers and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
Under the supervisionand with the participation of our management, including our Co-Chief Executive Officers and Chief Financial Officer, we conductedan evaluation of our disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Act. Based upon the foregoingevaluation, our Co-Chief Executive Officers and our Chief Financial Officer concluded that as of December 31, 2020 our disclosurecontrols and procedures were not effective at the reasonable assurance level.
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Changes inInternal Control over Financial Reporting
Except for the materialweakness identified below, there have not been any changes in our internal control over financial reporting (as such term is definedin Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fourth fiscal quarter to which this report relates that materiallyaffected, or are reasonably likely to materially affect, our internal control over financial reporting.
Report of Managementon Internal Control over Financial Reporting
Our management isresponsible for establishing and maintaining adequate internal control over financial reporting (as such term is defined in Rules13a-15(f) and 15d-15(f) under the Exchange Act). Under the supervision and with the participation of management, including ourCo-Chief Executive Officers and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal controlover financial reporting based on criteria established in Internal Control—Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission (2013 framework) issued by the Committee of Sponsoring Organizations of theTreadway Commission. Based on our evaluation, our management concluded that our internal control over financial reporting was effectiveas of December 31, 2020.
Our independent registeredpublic accounting firm, Marcum LLP, has audited the effectiveness of our internal control over financial reporting as of December31, 2020, as stated in their report which is included in the Financial Statements of this Annual Report on Form 10-K.
Remediation of Material Weakness
Since the quarterended December 31, 2019, management undertook remediation measures related to the previously reported material weakness in internalcontrol over financial reporting. We completed these remediation measures in the quarter ended June 30, 2020, including testingof the design and concluding on the operating effectiveness of the related controls. Specifically, we enhanced the related partypolicies and procedures, with a specific focus on related party disclosures, that included the creation of a related party oversightfunction and increasing the frequency of related party controls.
Inherent Limitation on Effectivenessof Controls
Our management, includingour Co-Chief Executive Officers and Chief Financial Officer, does not expect that our disclosure controls and procedures or ourinternal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well-designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will bemet. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls mustbe considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controlscan provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instancesof fraud, if any, have been detected. The design of any system of controls is based in part on certain assumptions about the likelihoodof future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potentialfuture conditions. Projections of any evaluation of the effectiveness of controls to future periods are subject to risks. Overtime, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policiesor procedures.
Item 9B. OTHERINFORMATION
None.
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PART III
Item 10. DIRECTORS,EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information calledfor by this item is hereby incorporated by reference from our definitive Proxy Statement relating to the 2021 Annual Meeting ofStockholders, which Proxy Statement is anticipated to be filed with the Securities and Exchange Commission within 120 days of December31, 2020.
Item 11. EXECUTIVECOMPENSATION
The information calledfor by this item is hereby incorporated by reference from our definitive Proxy Statement relating to the 2021 Annual Meeting ofStockholders, which Proxy Statement is anticipated to be filed with the Securities and Exchange Commission within 120 days of December31, 2020.
Item 12. SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information calledfor by this item is hereby incorporated by reference from our definitive Proxy Statement relating to the 2021 Annual Meeting ofStockholders, which Proxy Statement is anticipated to be filed with the Securities and Exchange Commission within 120 days of December31, 2020.
Item 13. CERTAINRELATIONSHIPS AND RELATED TRANACTIONS, AND DIRECTOR INDEPENDENCE
The information calledfor by this item is hereby incorporated by reference from our definitive Proxy Statement relating to the 2021 Annual Meeting ofStockholders, which Proxy Statement is anticipated to be filed with the Securities and Exchange Commission within 120 days of December31, 2020.
Item 14 . PRINCIPALACCOUNTANT FEES AND SERVICES
The information calledfor by this item is hereby incorporated by reference from our definitive Proxy Statement relating to the 2021 Annual Meeting ofStockholders, which Proxy Statement is anticipated to be filed with the Securities and Exchange Commission within 120 days of December31, 2020.
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PART IV
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
| (a) | The following documents are filed as part of this report: |
| 1. | Financial Statements. The Company’s Consolidated Financial Statements as of December31, 2020 and 2019 and for each of the three years in the year ended December 31, 2020 and the notes thereto, together with thereport of the independent auditors on those Consolidated Financial Statements and the effectiveness of internal control over financialreporting of the Company are hereby filed as part of this report, beginning on page F-1. |
| 2. | Financial Statement Schedules. |
Financial Statement Schedulesother than those listed above have been omitted because they are either not applicable or the information is otherwise includedin the consolidated financial statements or the notes thereto.
| (b) | Exhibits and Index to Exhibits, below. | |
| (c) | Exhibit Index |
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86
87
88
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| * | Filed herewith. | |
| ** | Furnished herewith. | |
| + | Schedules to this exhibit have been omitted pursuant to Item601(b)(2) of Regulation S-K. The registrant hereby agrees to furnish a copy of any omitted schedules to the Securities and ExchangeCommission upon request. | |
| # | Management contract or compensatory plan or arrangement. | |
| § | The Company has omitted certain information contained in this exhibit pursuant to Rule 601(b)(10)of Regulation S-K. The omitted information is not material and, if publicly disclosed, would likely cause competitive harm to theCompany. Certain schedules and annexes to this exhibit have been omitted pursuant to Item 601(a)(5) of Regulation S-K. A copy ofany omitted schedule and/or annex will be furnished to the U.S. Securities and Exchange Commission or its staff upon request. | |
| ^ | Pursuant to Item 601(b)(10) of Regulation S-K, certain annexesto the agreement have not been filed herewith. The registrant agrees to furnish supplementally a copy of any omitted annex tothe Securities and Exchange Commission upon request. |
Item16. FORM 10-K SUMMARY
None.
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SIGNATURES
Pursuant to the requirementsof Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalfby the undersigned, thereunto duly authorized.
| B. Riley Financial, Inc. | |
| Date: March 3, 2021 | / s / PHILLIP J. AHN |
|
(Phillip J. Ahn, Chief Financial Officer and
Chief Operating Officer) |
Pursuant to the requirementsof the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrantand in the capacities and on the date indicated:
| Signature | Title | Date | ||
| /s/ BRYANT R. RILEY | Co-Chief Executive Officer | March 3, 2021 | ||
| (Bryant R. Riley) | Chairman of the Board | |||
| (Principal Executive Officer) | ||||
| /s/ THOMAS J. KELLEHER | Co-Chief Executive Officer | March 3, 2021 | ||
| (Thomas J. Kelleher) | Director | |||
| /s/ PHILLIP J. AHN | Chief Financial Officer | March 3, 2021 | ||
| (Phillip J. Ahn) | Chief Operating Officer | |||
| (Principal Financial Officer) | ||||
| /s/ HOWARD E. WEITZMAN | Chief Accounting Officer | March 3, 2021 | ||
| (Howard E. Weitzman) | (Principal Accounting Officer) | |||
| /s/ ROBERT D’AGOSTINO | Director | March 3, 2021 | ||
| (Robert D’Agostino) | ||||
| /s/ ROBERT L. ANTIN | Director | March 3, 2021 | ||
| (Robert L. Antin) | ||||
| /s/ MICHAEL J. SHELDON | Director | March 3, 2021 | ||
| (Michael J. Sheldon) | ||||
| /s/ MIMI WALTERS | Director | March 3, 2021 | ||
| (Mimi Walters) | ||||
| /s/ RANDALL PAULSON | Director | March 3, 2021 | ||
| (Randall Paulson) | ||||
| /s/ MIKEL H. WILLIAMS | Director | March 3, 2021 | ||
| (Mikel H. Williams) |
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B. RILEY FINANCIAL, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| F- 1 |
REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directorsof
B. Riley Financial, Inc.
Opinion on the Financial Statements
We haveaudited the accompanying consolidated balance sheets of B. Riley Financial, Inc. and Subsidiaries (the “Company”) asof December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, equity and cash flows for eachof the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the “financialstatements”). In our opinion, the financial statements present fairly, in all material respects, the financial position ofthe Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three yearsin the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
We alsohave audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"),the Company's internal control over financial reporting as of December 31, 2020, based on the criteria established in InternalControl - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 2013 andour report dated March 3, 2021 , expressed an unqualified opinion on the effectiveness of the Company’s internalcontrol over financial reporting.
Basis for Opinion
These financialstatements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financialstatements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent withrespect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securitiesand Exchange Commission and the PCAOB.
We conductedour audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtainreasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Ouraudits included performing procedures to assess the risks of material misstatement of the financial statements, whether due toerror or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidenceregarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principlesused and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The criticalaudit matters communicated below are matters arising from the current period audit of the financial statements that were communicatedor required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to thefinancial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of criticalaudit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicatingthe critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures towhich they relate.
Impairment of Brands Indefinite-livedTradenames
Description of the Matter
At December31, 2020, the Company’s tradenames were valued at $125 million. Indefinite-lived intangible assets are tested for impairmentat least annually or when events occur that indicate impairment could exist. As more fully described in Note 8 to the consolidatedfinancial statements, during the first and second quarters of fiscal 2020, the Company identified the market effects of the COVID-19pandemic as an economic indicator requiring interim assessments. As a result of these assessments, the Company recognized an impairmentcharge of $12.5 million on the indefinite-lived tradenames in the Brands segment for the year ended December 31, 2020.
Subjectiveand challenging judgment is required by management in determining the assumptions and the valuation methodology in estimating thefair value of the Brands segment indefinite-lived tradenames. Auditing management’s impairment model for indefinite-livedtradenames was complex and required judgment due to the significant assumptions such as the revenue growth rates, long-term growthrate, effective tax rate, projected EBITDA margin, and discount rates. These assumptions are affected by expectations about futureeconomic and industry factors.
| F- 1 |
How We Addressed the Matter in Our Audit
Proceduresperformed to address this critical audit matter included the following. We obtained an understanding, evaluated the design, andtested the operating effectiveness of controls over the Company’s process to evaluate indefinite-lived intangible assetsfor impairment. For example, we tested management’s review controls over the significant assumptions described above as wellas over the data used in the valuation analyses. We also obtained an understanding, evaluated the test of design effectiveness,and tested the operating effectiveness of controls over the Company’s process of developing expectations for Brands and comparingrecorded amounts to those expectations.
With assistancefrom our valuation specialists, we evaluated the reasonableness of the valuation methodology and significant assumptions, includingpre-tax required rate of debt, effective tax rate, beta, WACC, and long-term growth rate used in the model. In addition, the valuationspecialists assisted in testing certain inputs utilized by comparing them to similar companies in the industry. We also performeda sensitivity analysis of the significant assumptions to evaluate the changes in the fair value of the tradename intangible assetsthat would result from changes in the assumptions; compared the revenue growth rates used in the valuation to current industryand economic trends; developed an independent expectation for comparison to management’s estimated revenue and expenses;and evaluated audit evidence from events or transactions occurring after the measurement date for comparison to management’sestimate.
Valuation of Certain Level 3 Investments
Description of the Matter
The Companyestimates the fair value of certain investments and loans receivable utilizing valuation models with unobservable inputs. UnlikeLevel 1 and 2 inputs, Level 3 inputs are unobservable, supported by little or no market activity, and are significant to the fairvalue of certain investments and loans receivable. At December 31, 2020, the Company had investments of $539,981,000 utilizingLevel 3 inputs.
Subjectiveand challenging judgment is required by management to determine the assumptions and valuation methodology to record financial assetsat their fair value using Level 3 inputs. Auditing management’s models to determine the fair value of certain investmentsand loans receivable was complex and required judgment, particularly when evaluating inputs such as discount rates, projected EBITDA,multiples of EBITDA, projected revenue, multiples of revenue, and expected annualized volatility rates. These assumptions are affectedby expectations about future economic and industry factors as well as estimates of the investee’s future growth.
How We Addressed the Matter in Our Audit
Proceduresperformed to address this critical audit matter included obtaining an understanding of the control environment, evaluating thedesign effectiveness, and testing the operating effectiveness of controls over the Company’s process to establish a valuationmethodology and determine assumptions used in valuation models to record financial assets at their fair value. For example, wetested management’s review controls over the significant assumptions described above as well as over the data used in thevaluation models.
With assistance from our valuationspecialists, we evaluated the reasonableness of the valuation methodology and significant assumptions; tested inputs for reasonableness,including discount rates, projected EBITDA, multiples of EBITDA, projected revenue, multiples of revenue, and expected annualizedvolatility rates; and corroborated with audit evidence from external sources or comparisons to other companies in the industry.We tested the Company's process used to develop the revenue and EBITDA projections and evaluated audit evidence from events ortransactions occurring after the measurement date for comparison to management’s estimate.
/s/ Marcum LLP
Marcum LLP
We have served as the Company’s auditorsince 2009.
New York, NY
March 3, 2021
| F- 2 |
REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER FINANCIAL REPORTING
To the Shareholdersand Board of Directors of
B. Riley Financial, Inc.
Opinion on InternalControl over Financial Reporting
We haveaudited B. Riley Financial, Inc.'s (the “Company”) internal control over financial reporting as of December 31, 2020,based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizationsof the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financialreporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issuedby the Committee of Sponsoring Organizations of the Treadway Commission.
We havealso audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”),the consolidated balance sheets as of December 31, 2020 and 2019 and the related consolidated statements of income, comprehensiveincome, equity, and cash flows and the related notes for each of the three years in the period ended December 31, 2020 of the Company,and our report dated March 3 , 2021 expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company'smanagement is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectivenessof internal control over financial reporting, included in the accompanying “Management Annual Report on Internal Controlover Financial Reporting”. Our responsibility is to express an opinion on the Company's internal control over financial reportingbased on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect tothe Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities andExchange Commission and the PCAOB.
We conductedour audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting was maintained in all material respects. Our auditof internal control over financial reporting included obtaining an understanding of internal control over financial reporting,assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internalcontrol based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in thecircumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitationsof Internal Control over Financial Reporting
A company’s internalcontrol over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenanceof records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements inaccordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made onlyin accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a materialeffect on the financial statements.
Because ofthe inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projectionsof any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changesin conditions, or that degree of compliance with the policies or procedures may deteriorate.
/s/ Marcum LLP
Marcum LLP
New York, NY
March 3, 2021
| F- 3 |
PART IV. FINANCIAL INFORMATION
Item 15. FinancialStatements.
B. RILEY FINANCIAL,INC. AND SUBSIDIARIES
Consolidated BalanceSheets
(Dollars in thousands,except par value)
|
December 31,
2020 |
December 31,
2019 |
|||||||
| Assets | ||||||||
| Assets: | ||||||||
| Cash and cash equivalents | $ |
|
$ |
|
||||
| Restricted cash |
|
|
||||||
| Due from clearing brokers |
|
|
||||||
| Securities and other investments owned, at fair value |
|
|
||||||
| Securities borrowed |
|
|
||||||
| Accounts receivable, net |
|
|
||||||
| Due from related parties |
|
|
||||||
| Advances against customer contracts |
|
|
||||||
|
Loans receivable, at fair value (includes $
|
|
|
||||||
|
Loans receivable, at cost (includes $
|
|
|||||||
| Prepaid expenses and other assets |
|
|
||||||
| Operating lease right-of-use assets |
|
|
||||||
| Property and equipment, net |
|
|
||||||
| Goodwill |
|
|
||||||
| Other intangible assets, net |
|
|
||||||
| Deferred tax assets, net |
|
|
||||||
| Total assets | $ |
|
$ |
|
||||
| Liabilities and Equity | ||||||||
| Liabilities: | ||||||||
| Accounts payable | $ |
|
$ |
|
||||
| Accrued expenses and other liabilities |
|
|
||||||
| Deferred revenue |
|
|
||||||
| Deferred tax liabilities, net |
|
— | ||||||
| Due to related parties and partners |
|
|
||||||
| Due to clearing brokers |
|
— | ||||||
| Securities sold not yet purchased |
|
|
||||||
| Securities loaned |
|
|
||||||
| Mandatorily redeemable noncontrolling interests |
|
|
||||||
| Operating lease liabilities |
|
|
||||||
| Notes payable |
|
|
||||||
| Loan participations sold |
|
|
||||||
| Term loan |
|
|
||||||
| Senior notes payable, net |
|
|
||||||
| Total liabilities |
|
|
||||||
| Commitments and contingencies (Note 17) | ||||||||
| B. Riley Financial, Inc. stockholders’ equity: | ||||||||
|
Preferred stock, $
|
||||||||
|
Common stock, $
|
|
|
||||||
| Additional paid-in capital |
|
|
||||||
| Retained earnings |
|
|
||||||
| Accumulated other comprehensive loss |
(
|
) |
(
|
) | ||||
| Total B. Riley Financial, Inc. stockholders’ equity |
|
|
||||||
| Noncontrolling interests |
|
|
||||||
| Total equity |
|
|
||||||
| Total liabilities and equity | $ |
|
$ |
|
||||
The accompanying notes are an integralpart of these consolidated financial statements.
| F- 4 |
B. RILEY FINANCIAL,INC. AND SUBSIDIARIES
Consolidated Statementsof Income
(Dollars in thousands,except share data)
| Year Ended December 31, | ||||||||||||
| 2020 | 2019 | 2018 | ||||||||||
| Revenues: | ||||||||||||
| Services and fees | $ |
|
$ |
|
$ |
|
||||||
| Trading income (loss) and fair value adjustments on loans |
|
|
(
|
) | ||||||||
| Interest income - Loans and securities lending |
|
|
|
|||||||||
| Sale of goods |
|
|
|
|||||||||
| Total revenues |
|
|
|
|||||||||
| Operating expenses: | ||||||||||||
| Direct cost of services |
|
|
|
|||||||||
| Cost of goods sold |
|
|
|
|||||||||
| Selling, general and administrative expenses |
|
|
|
|||||||||
| Restructuring charge |
|
|
|
|||||||||
| Impairment of tradenames |
|
|||||||||||
| Interest expense - Securities lending and loan participations sold |
|
|
|
|||||||||
| Total operating expenses |
|
|
|
|||||||||
| Operating income |
|
|
|
|||||||||
| Other income (expense): | ||||||||||||
| Interest income |
|
|
|
|||||||||
| (Loss) income from equity investments |
(
|
) |
(
|
) |
|
|||||||
| Interest expense |
(
|
) |
(
|
) |
(
|
) | ||||||
| Income before income taxes |
|
|
|
|||||||||
| Provision for income taxes |
(
|
) |
(
|
) |
(
|
) | ||||||
| Net income |
|
|
|
|||||||||
| Net (loss) income attributable to noncontrolling interests |
(
|
) |
|
|
||||||||
| Net income attributable to B. Riley Financial, Inc. |
|
|
|
|||||||||
| Preferred stock dividends |
|
|
||||||||||
| Net income available to common shareholders | $ |
|
$ |
|
$ |
|
||||||
| Basic income per common share | $ |
|
$ |
|
$ |
|
||||||
| Diluted income per common share | $ |
|
$ |
|
$ |
|
||||||
| Weighted average basic common shares outstanding |
|
|
|
|||||||||
| Weighted average diluted common shares outstanding |
|
|
|
|||||||||
The accompanying notes are an integralpart of these consolidated financial statements.
| F- 5 |
B. RILEY FINANCIAL,INC. AND SUBSIDIARIES
Consolidated Statementsof Comprehensive Income
(Dollars in thousands)
| Year Ended December 31, | ||||||||||||
| 2020 | 2019 | 2018 | ||||||||||
| Net income | $ |
|
$ |
|
$ |
|
||||||
| Other comprehensive income (loss): | ||||||||||||
| Change in cumulative translation adjustment |
|
|
(
|
) | ||||||||
| Other comprehensive income (loss), net of tax |
|
|
(
|
) | ||||||||
| Total comprehensive income |
|
|
|
|||||||||
| Comprehensive (loss) income attributable to noncontrolling interests |
(
|
) |
|
|
||||||||
| Comprehensive income attributable to B. Riley Financial, Inc. | $ |
|
$ |
|
$ |
|
||||||
The accompanying notes are an integralpart of these consolidated financial statements.
| F- 6 |
B. RILEY FINANCIAL,INC. AND SUBSIDIARIES
Consolidated Statementsof Equity
(Dollars in thousands,except share data)
| Accumulated | ||||||||||||||||||||||||||||||||||||
| Additional | Other | |||||||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid-in | Retained | Comprehensive | Noncontrolling | Total | ||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Earnings | Loss | Interests | Equity | ||||||||||||||||||||||||||||
| Balance, January 1, 2018 | $ |
|
$ |
|
$ |
|
$ |
|
$ |
(
|
) | $ |
(
|
) | $ |
|
||||||||||||||||||||
| Issuance of common stock for acquisition of GlassRatner Advisory & Capital Group LLC |
|
|
|
|||||||||||||||||||||||||||||||||
| ESPP shares issued and vesting of restricted stock, net of shares withheld for employer taxes |
|
(
|
) |
(
|
) | |||||||||||||||||||||||||||||||
| Common shares cancelled - resolution of escrow claim |
(
|
) | ||||||||||||||||||||||||||||||||||
| Common stock repurchased and retired |
(
|
) |
(
|
) |
(
|
) | ||||||||||||||||||||||||||||||
| Share based payments | — | — |
|
|
||||||||||||||||||||||||||||||||
|
Dividends on common stock
($ |
— | — |
(
|
) |
(
|
) | ||||||||||||||||||||||||||||||
| Net income | — | — |
|
|
|
|||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — |
(
|
) |
(
|
) | ||||||||||||||||||||||||||||||
| Balance, December 31, 2018 | $ |
|
$ |
|
$ |
|
$ |
|
$ |
(
|
) | $ |
|
$ |
|
|||||||||||||||||||||
| Common stock issued |
|
|
|
|||||||||||||||||||||||||||||||||
| Preferred stock issued |
|
|
|
|||||||||||||||||||||||||||||||||
| Issuance of common stock warrant for purchase of BR Brand Holdings, LLC | — | — |
|
|
||||||||||||||||||||||||||||||||
| ESPP shares issued and vesting of restricted stock, net of shares withheld for employer taxes |
|
|
(
|
) |
(
|
) | ||||||||||||||||||||||||||||||
| Common stock repurchased and retired |
(
|
) |
(
|
) |
(
|
) | ||||||||||||||||||||||||||||||
| Warrants repurchased and retired | — | — |
(
|
) |
(
|
) | ||||||||||||||||||||||||||||||
| Share based payments | — | — |
|
|
||||||||||||||||||||||||||||||||
|
Dividends on common stock
($ |
— | — |
(
|
) |
(
|
) | ||||||||||||||||||||||||||||||
|
Dividends on preferred stock
($ |
— | — |
(
|
) |
(
|
) | ||||||||||||||||||||||||||||||
| Net income | — | — |
|
|
|
|||||||||||||||||||||||||||||||
| Distributions to noncontrolling interests | — | — |
(
|
) |
(
|
) | ||||||||||||||||||||||||||||||
| Noncontrolling interest from purchase of BR Brand Holdings, LLC | — | — |
|
|
||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — |
|
|
||||||||||||||||||||||||||||||||
| Balance, December 31, 2019 |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
(
|
) | $ |
|
$ |
|
||||||||||||||||||||
| Preferred stock issued |
|
|
|
|||||||||||||||||||||||||||||||||
| ESPP shares issued and vesting of restricted stock, net of shares withheld for employer taxes |
|
(
|
) |
(
|
) | |||||||||||||||||||||||||||||||
| Common stock repurchased and retired |
(
|
) |
(
|
) |
(
|
) | ||||||||||||||||||||||||||||||
| Share based payments | — | — |
|
|
||||||||||||||||||||||||||||||||
|
Dividends on common stock
($ |
— | — |
(
|
) |
(
|
) | ||||||||||||||||||||||||||||||
|
Dividends on preferred stock
($ |
— | — |
(
|
) |
(
|
) | ||||||||||||||||||||||||||||||
| Net income (loss) | — | — |
|
(
|
) |
|
||||||||||||||||||||||||||||||
| Distributions to noncontrolling interests | — | — |
(
|
) |
(
|
) | ||||||||||||||||||||||||||||||
| Contributions from noncontrolling interests | — | — |
|
|
||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — |
|
|
||||||||||||||||||||||||||||||||
| Balance, Year Ended December 31, 2020 |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
(
|
) | $ |
|
$ |
|
||||||||||||||||||||
The accompanying notes are an integralpart of these consolidated financial statements.
| F- 7 |
B. RILEY FINANCIAL,INC. AND SUBSIDIARIES
Consolidated Statementsof Cash Flows
(Dollars in thousands)
| Year Ended December 31, | ||||||||||||
| 2020 | 2019 | 2018 | ||||||||||
| Cash flows from operating activities: | ||||||||||||
| Net income | $ |
|
$ |
|
$ |
|
||||||
| Adjustments to reconcile net income to net cash used in operating activities: | ||||||||||||
| Depreciation and amortization |
|
|
|
|||||||||
| Provision for doubtful accounts |
|
|
|
|||||||||
| Share-based compensation |
|
|
|
|||||||||
| Fair value adjustments, non-cash |
|
|
— | |||||||||
| Non-cash interest and other |
(
|
) |
(
|
) |
|
|||||||
| Effect of foreign currency on operations |
(
|
) |
(
|
) |
(
|
) | ||||||
| Loss (income) from equity investments |
|
|
(
|
) | ||||||||
| Dividends from equity investments |
|
|
|
|||||||||
| Deferred income taxes |
|
|
|
|||||||||
| Impairment of leaseholds and intangibles, lease loss accrual and gain on disposal of fixed assets |
|
(
|
) |
|
||||||||
| Gain on extinguishment of debt |
(
|
) | — | — | ||||||||
| Income allocated and fair value adjustment for mandatorily redeemable noncontrolling interests |
|
|
|
|||||||||
| Change in operating assets and liabilities: | ||||||||||||
| Amounts due to/from clearing brokers |
|
|
(
|
) | ||||||||
| Securities and other investments owned |
(
|
) |
(
|
) |
(
|
) | ||||||
| Securities borrowed |
|
|
(
|
) | ||||||||
| Accounts receivable and advances against customer contracts |
|
(
|
) |
(
|
) | |||||||
| Prepaid expenses and other assets |
|
|
(
|
) | ||||||||
| Accounts payable, accrued payroll and related expenses, accrued expenses and other liabilities |
|
|
|
|||||||||
| Amounts due to/from related parties and partners |
|
(
|
) |
|
||||||||
| Securities sold, not yet purchased |
(
|
) |
|
|
||||||||
| Deferred revenue |
|
(
|
) |
(
|
) | |||||||
| Securities loaned |
(
|
) |
(
|
) |
|
|||||||
| Net cash provided by (used in) operating activities |
|
(
|
) |
(
|
) | |||||||
| Cash flows from investing activities: | ||||||||||||
| Purchases of loans receivable |
(
|
) |
(
|
) |
(
|
) | ||||||
| Repayments of loans receivable |
|
|
— | |||||||||
| Sale of loan receivable to related party |
|
— | — | |||||||||
| Proceeds from loan participations sold |
|
|
— | |||||||||
| Repayment of loan participations sold |
(
|
) |
(
|
) | — | |||||||
|
Asset acquisition - BR Brand, net of cash acquired $
|
— |
(
|
) | — | ||||||||
|
Acquisition of magicJack, net of cash acquired $
|
— | — |
(
|
) | ||||||||
| Acquisition of other businesses |
(
|
) | — |
(
|
) | |||||||
| Proceeds from sale of division of magicJack | — |
|
— | |||||||||
| Purchases of property, equipment and intangible assets |
(
|
) |
(
|
) |
(
|
) | ||||||
| Proceeds from sale of property, equipment and intangible assets |
|
|
|
|||||||||
| Purchases of equity investments |
(
|
) |
(
|
) |
(
|
) | ||||||
| Distributions from equity investments | — |
|
— | |||||||||
| Net cash used in investing activities |
(
|
) |
(
|
) |
(
|
) | ||||||
| Cash flows from financing activities: | ||||||||||||
| Proceeds from asset based credit facility | — |
|
|
|||||||||
| Repayment of asset based credit facility |
(
|
) |
(
|
) |
(
|
) | ||||||
| Proceeds from notes payable | — | — |
|
|||||||||
| Repayment of notes payable |
(
|
) |
(
|
) |
(
|
) | ||||||
| Payment of participating note payable and contingent consideration |
(
|
) |
(
|
) | — | |||||||
| Proceeds from term loan |
|
|
|
|||||||||
| Repayment of term loan |
(
|
) |
(
|
) | — | |||||||
| Proceeds from issuance of senior notes |
|
|
|
|||||||||
| Redemption of senior notes |
(
|
) |
(
|
) | — | |||||||
| Payment of debt issuance costs |
(
|
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| Payment of employment taxes on vesting of restricted stock |
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| Common dividends paid |
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| Preferred dividends paid |
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| Repurchase of common stock |
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| Repurchase of warrants | — |
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| Distribution to noncontrolling interests |
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| Contributions from noncontrolling interests |
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— | — | |||||||||
| Proceeds from offering common stock | — |
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— | |||||||||
| Proceeds from offering preferred stock |
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— | |||||||||
| Net cash provided by financing activities |
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| (Decrease) increase in cash, cash equivalents and restricted cash |
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| Effect of foreign currency on cash, cash equivalents and restricted cash |
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| Cash, cash equivalents and restricted cash, beginning of year |
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| Cash, cash equivalents and restricted cash, end of year | $ |
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$ |
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$ |
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| Supplemental disclosures: | ||||||||||||
| Interest paid | $ |
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$ |
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$ |
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| Taxes paid | $ |
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$ |
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$ |
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The accompanying notes are an integral part of these consolidatedfinancial statements.
| F- 8 |
B. RILEY FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data)
NOTE 1—ORGANIZATION AND NATURE OF BUSINESSOPERATIONS
B. Riley Financial,Inc. and its subsidiaries (collectively, the “Company”) provide investment banking and financial services to corporate,institutional and high net worth clients, and asset disposition, financial consulting, appraisal and capital advisory servicesto a wide range of retail, wholesale and industrial clients, as well as lenders, capital providers, private equity investors andprofessional services firms throughout the United States, Australia, Canada, and Europe and consumer Internet access and cloudcommunication services through its wholly-owned subsidiaries United Online, Inc. (“UOL” or “United Online”)and magicJack VocalTec Ltd. (“magicJack”). The Company acquired a majority ownership interest in BR Brands Holding,LLC (“BR Brands” or “Brands”) on October 28, 2019, which provides licensing of trademarks.
During the fourthquarter of 2020, the Company realigned its segment reporting structure to reflect organizational management changes. Underthe new structure, the valuation and appraisal businesses are reported in the Financial Consulting segment and ourbankruptcy, financial advisory, forensic accounting, and real estate consulting businesses that were previously reported inthe Capital Markets segment are now reported as part of the Financial Consulting segment. In conjunction with the newreporting structure, the Company recast its segment presentation for all periods presented.
The Company operatesin
On January 30, 2020,the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus (the“COVID-19 outbreak”). In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on therapid increase in exposure globally. Coming into 2021, the full impact of the COVID-19 outbreak continues to evolve,as countries across the world manage repeated waves of the pandemic and vaccines come to market. The impact of the COVID-19outbreak on the Company’s results of operations, financial position and cash flows will depend on future developments, includingthe duration and spread of the outbreak and related advisories and restrictions and the success of vaccines in slowing or haltingthe pandemic. These developments and the impact of the COVID-19 outbreak on the financial markets and the overall economycontinue to be highly uncertain and cannot be predicted. If the financial markets and/or the overall economy continue to be impacted,the Company’s results of operations, financial position and cash flows may be materially adversely affected.
NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES
( a) Principles of Consolidation andBasis of Presentation
The consolidated financialstatements include the accounts of B. Riley Financial, Inc. and its wholly-owned and majority-owned subsidiaries. The consolidatedfinancial statements also include the accounts of Great American Global Partners, LLC which is controlled by the Company as aresult of its ownership of a
The accounting guidancerequires an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests giveit a controlling financial interest in a variable interest entity; to require ongoing reassessments of whether an enterprise isthe primary beneficiary of a Variable Interest Entity (“VIE”); to eliminate the solely quantitative approach previouslyrequired for determining the primary beneficiary of a VIE; to add an additional reconsideration event for determining whetheran entity is a VIE when any changes in facts and circumstances occur such that holders of the equity investment at risk, as agroup, lose the power from voting rights or similar rights of those investments to direct the activities of the entity that mostsignificantly impact the entity’s economic performance; and to require enhanced disclosures that will provide users of financialstatements with more transparent information about an enterprise’s involvement in a VIE.
(b) Use of Estimates
The preparation of theconsolidated financial statements in accordance with accounting principles generally accepted in the United States of America(“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilitiesat the date of the consolidated financial statements and reported amounts of revenue and expense during the reporting period.Estimates are used when accounting for certain items such as valuation of securities, allowance for doubtful accounts, the fairvalue of intangible assets and goodwill, the fair value of mandatorily redeemable noncontrolling interests, fair value of sharebased arrangements and accounting for income tax valuation allowances, recovery of contract assets and sales returns and allowances.Estimates are based on historical experience, where applicable, and assumptions that management believes are reasonable underthe circumstances. Due to the inherent uncertainty involved with estimates, actual results may differ.
| F- 9 |
(c) Revenue Recognition
On January 1, 2018,the Company adopted Accounting Standards Codification (“ASC”) 606 – Revenue from Contracts with Customers using the modified retrospective method and the impact was determined to be immaterial on our consolidated financial statements.The new revenue standard was applied prospectively in the Company’s consolidated financial statements from January 1, 2018forward and reported financial information for historical comparable periods will not be revised and will continue to be reportedunder the accounting standards in effect during those historical periods.
Revenues are recognizedwhen control of the promised goods or performance obligations for services is transferred to the Company’s customers, inan amount that reflects the consideration the Company expects to be entitled to in exchange for the goods or services.
Revenues from contractswith customers in the Capital Markets segment, Auction and Liquidation segment, Financial Consulting segment, Principal Investments– United Online and magicJack segment and Brands segment are primarily comprised of the following:
Capital Marketssegment – Fees earned from corporate finance and investment banking services are derived from debt, equity and convertiblesecurities offerings in which the Company acted as an underwriter or placement agent. Fees from underwriting activities are recognizedas revenues when the performance obligation for the services related to the underwriting transaction is satisfied under the termsof the engagement and is not subject to any other contingencies. Fees are also earned from financial advisory and consulting servicesrendered in connection with client mergers, acquisitions, restructurings, recapitalizations and other strategic transactions.The performance obligation for financial advisory services is satisfied over time as work progresses on the engagement and servicesare delivered to the client. The performance obligation for financial advisory services may also include success and performancebased fees which are recognized as revenue when the performance obligation is no longer constrained and it is not probable thatthe revenue recognized would be subject to significant reversal in a future period. Generally, it is probable that the revenuerecognized is no longer subject to significant reversal upon the closing of the investment banking transaction.
Fees from wealth andasset management services consist primarily of investment management fees that are recognized over the period the performanceobligation for the services are provided. Investment management fees are primarily comprised of fees for investment managementservices and are generally based on the dollar amount of the assets being managed.
Revenues from salesand trading are recognized when the performance obligation is satisfied and include commissions resulting from equity securitiestransactions executed as agent or principal and are recorded on a trade date basis and fees paid for equity research.
Revenues fromother sources in the Capital Markets segment is primarily comprised of (i) interest income from loans receivable andsecurities lending activities, (ii) related net trading gains and losses from market making activities, the commitment ofcapital to facilitate customer orders and fair value adjustments on loans, (iii) trading activities from the Company’sprincipal investments in equity and other securities for the Company’s account, and (iv) other income.
Interest income fromsecurities lending activities consists of interest income from equity and fixed income securities that are borrowed from one partyand loaned to another. The Company maintains relationships with a broad group of banks and broker-dealers to facilitate the sourcing,borrowing and lending of equity and fixed income securities in a “matched book” to limit the Company’s exposureto fluctuations in the market value or securities borrowed and securities loaned.
Other revenues include(i) net trading gains and losses from market making activities in the Company’s fixed income group, (ii) carried interestfrom the Company’s asset management recognized as earnings from financial assets within the scope of ASC 323 - Investments- Equity Method and Joint Ventures , and therefore will not be in the scope of ASC 606 - Revenue from Contracts with Customers .In accordance with ASC 323 - Investments - Equity Method and Joint Ventures , the Company will record equity methodincome (losses) as a component of investment income based on the change in the Company’s proportionate claim on net assetsof the investment fund, including performance-based capital allocations, assuming the investment fund was liquidated as of eachreporting date pursuant to each fund’s governing agreements, and (iii) other miscellaneous income.
| F- 10 |
Auction and Liquidationsegment – Commission and fees earned on the sale of goods at Auction and Liquidation sales are recognized when evidenceof a contract or arrangement exists, the transaction price has been determined, and the performance obligation has been satisfiedwhen control of the product and risks of ownership has been transferred to the buyer. The commission and fees earned for theseservices are included in revenues in the accompanying consolidated statements of income. Under these types of arrangements, revenuesalso include contractual reimbursable costs.
Revenues earned fromAuction and Liquidation services contracts where the Company guarantees a minimum recovery value for goods being sold at auctionor liquidation are recognized over time when the performance obligation is satisfied. The Company generally uses the cost-to-costmeasure of progress for the Company’s contracts because it best depicts the transfer of services to the customer which occursas the Company incurs costs on its contracts. Under the cost-to-cost measure of progress, the extent of progress towards completionis measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation.Revenues, including estimated fees or profits, are recorded proportionally as costs are incurred. Costs to fulfill the contractinclude labor and other direct costs incurred by the company related to the contract. Due to the nature of the guarantees andperformance obligations under these contracts, the estimation of revenue that is ultimately earned is complex and subject to manyvariables and requires significant judgment. It is common for these contracts to contain provisions that can either increase ordecrease the transaction price upon completion of the Company’s performance obligations under the contract. Estimated amountsare included in the transaction price at the most likely amount it is probable that a significant reversal of revenue will notoccur. The Company estimates of variable consideration and determination of whether or not to include estimated amounts in thetransaction price are based on an assessment of the Company’s anticipated performance under the contract taking into considerationall historical, current and forecasted information that is reasonably available to the Company. Costs that directly relate tothe contract and expected to be recoverable are capitalized as an asset and included in advances against customer contracts inthe accompanying consolidated balance sheets. These costs are amortized as the services are transferred to the customer over thecontract period, which generally does not exceed six months, and the expense is recognized as a component of direct cost of services.If, during the auction or liquidation sale, the Company determines that the total costs to be incurred on a performance obligationunder a contract exceeds the total estimated revenues to be earned, a provision for the entire loss on the performance obligationis recognized in the period the loss is determined.
If the Company determinesthat the variable consideration used in the initial determination of the transaction price for the contract is such that the totalrecoveries from the auction or liquidation will not exceed the guaranteed recovery values or advances made in accordance withthe contract, the transaction price will be reduced and a loss or negative revenue could result from the performance obligation.A provision for the entire loss as negative revenue on the performance obligation is recognized in the period the loss is determined.
Financial Consultingsegment – Revenues in the Financial Consulting segment are primarily comprised of fees earned from providing bankruptcy,financial advisory, forensic accounting, real estate consulting and valuation and appraisal services. Fees earned from bankruptcy,financial advisory, forensic accounting and real estate consulting services are rendered to clients over time as work progresseson the engagement and services are delivered to the client. Fees may also include success and performance based fees which arerecognized as revenue when the performance obligation is no longer constrained and it is not probable that the revenue recognizedwould be subject to significant reversal in a future period. Revenues for valuation and appraisal services are recognized whenthe performance obligation is completed and is generally at the point in time upon delivery of the report to the customer. Revenuesin the Financial Consulting segment also include contractual reimbursable costs.
Principal Investments– United Online and magicJack segment – Revenues in the Principal Investments - United Online and magicJack segmentare primarily comprised of services revenue from fees charged to United Online pay accounts; sales revenue from the sale of themagicJack and related devices and access rights; revenues from access rights renewals and mobile apps; prepaid minutes revenues;revenues from access and wholesale charges; service revenue from Unified Communication as a Service (“UCaaS”) hostingservices; advertising and other revenues; and products revenues from the sale of magicJack and mobile broadband service devices,including the related shipping and handling and installation fees, if applicable.
Service revenues fromfees charged to United Online pay accounts are recognized in the period in which fees are fixed or determinable and the relatedservices are provided to the customer. The Company’s pay accounts generally pay in advance for their services by creditcard, PayPal, automated clearinghouse or check, and revenues are then recognized ratably over the service period. Advance paymentsfrom pay accounts are recorded in the consolidated balance sheets as deferred revenue. In circumstances where payment is not receivedin advance, revenues are only recognized if collectability is probable.
Revenues from salesof the magicJack devices and access rights represent revenues recognized from sales of the magicJack devices to retailers, wholesalers,or direct to customers, net of returns, over the period associated with the access right period. Revenues for the device and initialaccess right were accounted for as a combined unit of accounting and recognized ratably over the service term. The transactionprice for magicJack devices is allocated between equipment and service based on stand-alone selling prices. Revenues allocatedto equipment are recognized upon delivery (when control transfers to the customer), and service revenue is recognized ratablyover the service term. The Company estimates the return of direct sales as part of the transaction price using a six month rollingaverage of historical returns. Revenues for hardware and shipping are recognized at the time of delivery and revenues for servicesare recognized ratably over the service term. The Company recognizes revenue for hardware based on delivery terms to the retailerand revenue for service is deferred for the delay period and recognized ratably over the remaining access right period.
| F- 11 |
Revenues from accessrights renewals and mobile apps represents revenues from customers purchasing rights to access the Company’s servers beyondthe access right period included in a magicJack device or magicJack service. The extended access right ranges from one to fiveyears. These fees charged to customers are initially deferred and recognized as revenue ratably over the extended access rightperiod. Revenues from access rights granted to users of the magicJack Apps are recognized ratably over the access right period.
Revenues from thesale of other magicJack related products are revenues recognized from the sale of other items related to the magicJack devicesand access right renewals the Company offers its customers, including porting fees charged to customers to port their existingphone number to a magicJack device or services, fees charged for customer to select a custom, vanity or Canadian phone numberand fees charged to customers to change their existing number. These revenues are recognized at the time of sale.
Prepaid minutes revenuesare primarily from the usage and expiration of international prepaid minutes, net of chargebacks. Revenues from prepaid minutesare recognized as minutes are used.
Revenues from accessand wholesale charges are generated from access fees charged to other telecommunication carriers or providers for InterexchangeCarriers (“IXC”) calls terminated to the Company’s end-users, and other fees charged to telecommunication carriersor providers for origination of calls to their 800-numbers. These revenues are recorded based on rates set forth in the respectivestate and federal tariffs or negotiated contract rates, less provisions for billing adjustments. Revenues from access and wholesalecharges are recognized as calls are terminated to the network.
UCaaS revenues arerecurring monthly service revenue from sales of its hosted services. Customers are billed monthly in advance for these recurringservices and in arrears for one time service charges and other certain usage charges. UCaaS revenues also includes non-recurringrevenue from the sale of hardware and network equipment. Revenues for recurring monthly service are recorded in the period theservices are provided over the term of the respective customer agreements and revenue from the sale of hardware and network equipmentis recognized in the period that the equipment is delivered and put into service.
Advertising revenuesconsist primarily of amounts from the Company’s Internet search partner that are generated as a result of users utilizingthe partner’s Internet search services and amounts generated from display advertisements. The Company recognizes such advertisingrevenues in the period in which the advertisement is displayed or, for performance-based arrangements, when the related performancecriteria are met. In determining whether an arrangement exists, the Company ensures that a written contract is in place, suchas a standard insertion order or a customer-specific agreement. The Company assesses whether performance criteria have been metand whether the fees are fixed or determinable based on a reconciliation of the performance criteria and the payment terms associatedwith the transaction. The reconciliation of the performance criteria generally includes a comparison of customer-provided performancedata to the contractual performance obligation and to internal or third-party performance data in circumstances where that datais available.
Brands segment – Licensing revenue results from various license agreements that provide revenue based on guaranteed minimum royaltyamounts and advertising/marketing fees with additional royalty revenue based on a percentage of defined sales. Guaranteed minimumroyalty amounts are recognized as revenue on a straight-line basis over the full contract term. Royalty payments exceeding theguaranteed minimum amounts in a specific contract year are recognized only subsequent to when the guaranteed minimum amount hasbeen achieved. Other licensing fees are recognized at a point in time once the performance obligations have been satisfied.
Payments receivedas consideration for the grant of a license are recorded as deferred revenue at the time payment is received and recognized ratablyas revenue over the term of the license agreement. Advanced royalty payments are recorded as deferred revenue at the time paymentis received and recognized as revenue when earned. Revenue is not recognized unless collectability is probable.
(d) Direct Costof Services
Direct cost of servicesrelates to service and fee revenues. Direct costs of services include participation in profits under collaborative arrangementsin which the Company is a majority participant. Direct costs of services also include the cost of consultants and other directexpenses related to Auction and Liquidation contracts pursuant to commission and fee based arrangements in the Auction and Liquidationsegment. Direct cost of services in the Principal Investments - United Online and magicJack segment include cost of telecommunicationsand data center costs, personnel and overhead-related costs associated with operating the Company’s networks, servers anddata centers, sales commissions associated with multi-year service plans, depreciation of network computers and equipment, amortizationexpense, third party advertising sales commissions, license fees, costs related to providing customer support, costs related tocustomer billing and processing of customer credit cards and associated bank fees. Direct cost of services does not include anallocation of the Company’s overhead costs.
| F- 12 |
(e) Interest Expense - Securities LendingActivities and Loan Participations Sold
Interest expense fromsecurities lending activities is included in operating expenses related to operations in the Capital Markets segment. Interestexpense from securities lending activities is incurred from equity and fixed income securities that are loaned to the Companyand totaled $
(f) Concentrationof Risk
Revenues in the CapitalMarkets, Financial Consulting, Principal Investments - United Online and magicJack and Brands segments are currently primarilygenerated in the United States. Revenues in the Auction and Liquidation segment are primarily generated in the United States,Australia, Canada and Europe.
The Company’sactivities in the Auction and Liquidation segment are executed frequently with, and on behalf of, distressed customers and securedcreditors. Concentrations of credit risk can be affected by changes in economic, industry, or geographical factors. The Companyseeks to control its credit risk and potential risk concentration through risk management activities that limit the Company’sexposure to losses on any one specific liquidation services contract or concentration within any one specific industry. To mitigatethe exposure to losses on any one specific liquidations services contract, the Company sometimes conducts operations with thirdparties through collaborative arrangements.
The Company maintainscash in various federally insured banking institutions. The account balances at each institution periodically exceed the FederalDeposit Insurance Corporation’s (“FDIC”) insurance coverage, and as a result, there is a concentration of creditrisk related to amounts in excess of FDIC insurance coverage. The Company has not experienced any losses in such accounts. TheCompany also has substantial cash balances from proceeds received from auctions and liquidation engagements that are distributedto parties in accordance with the collaborative arrangements.
(g)Advertising Expenses
The Company expensesadvertising costs, which consist primarily of costs for printed materials, as incurred. Advertising costs totaled $
(h)Share-Based Compensation
The Company’sshare-based payment awards principally consist of grants of restricted stock, restricted stock units and costs associated withthe Company’s employee stock purchase plan. In accordance with the applicable accounting guidance, share-based payment awardsare classified as either equity or liabilities. For equity-classified awards, the Company measures compensation cost for the grantof membership interests at fair value on the date of grant and recognizes compensation expense in the consolidated statementsof income over the requisite service or performance period the award is expected to vest.
In June 2018, the Companyadopted the 2018 Employee Stock Purchase Plan (“Purchase Plan”) which allows eligible employees to purchase commonstock through payroll deductions at a price that is 85% of the market value of the common stock on the last day of the offeringperiod. In accordance with the provisions of ASC 718,
Compensation - Stock Compensation
(“ASC 718”), the Companyis required to recognize compensation expense relating to shares offered under the Purchase Plan. For the years ended December31, 2020, 2019 and 2018, the Company recognized compensation expense of $
(i) Income Taxes
The Companyrecognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been included inthe consolidated financial statements or tax returns. Deferred tax liabilities and assets are determined based on thedifference between the financial statement basis and tax basis of assets and liabilities using enacted tax rates in effectfor the year in which the differences are expected to reverse. The Company estimates the degree to which tax assets andcredit carryforwards will result in a benefit based on expected profitability by tax jurisdiction. A valuation allowance forsuch tax assets and loss carryforwards is provided when it is determined to be more likely than not that the benefit of suchdeferred tax asset will not be realized in future periods. Tax benefits of operating loss carryforwards are evaluated on anongoing basis, including a review of historical and projected future operating results, the eligible carryforward period, andother circumstances. If it becomes more likely than not that a tax asset will be used, the related valuation allowance onsuch assets would be reduced.
| F- 13 |
The Company recognizestax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examinationby the taxing authorities, based on the technical merits of the position. Once this threshold has been met, the Company’smeasurement of its expected tax benefits is recognized in its financial statements. The Company accrues interest on unrecognizedtax benefits as a component of income tax expense. Penalties, if incurred, would be recognized as a component of income tax expense.
(j)Cash and Cash Equivalents
The Company considersall highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
(k)Restricted Cash
As of December 31,2020, restricted cash included $
(l)Securities Borrowed and Securities Loaned
Securities borrowedand securities loaned are recorded based upon the amount of cash advanced or received. Securities borrowed transactions facilitatethe settlement process and require the Company to deposit cash or other collateral with the lender. With respect to securitiesloaned, the Company receives collateral in the form of cash. The amount of collateral required to be deposited for securitiesborrowed, or received for securities loaned, is an amount generally in excess of the market value of the applicable securitiesborrowed or loaned. The Company monitors the market value of the securities borrowed and loaned on a daily basis, with additionalcollateral obtained, or excess collateral recalled, when deemed appropriate.
The Company accountsfor securities lending transactions in accordance with ASC “Topic 210: Balance Sheet,” which requires companies toreport disclosures of offsetting assets and liabilities. The Company does not net securities borrowed and securities loaned andthese items are presented on a gross basis in the consolidated balance sheets.
(m)Due from/to Brokers, Dealers, and Clearing Organizations
The Company clearsall of its proprietary and customer transactions through other broker-dealers on a fully disclosed basis. The amount receivablefrom or payable to the clearing brokers represents the net of proceeds from unsettled securities sold, the Company’s clearingdeposits and amounts receivable for commissions less amounts payable for unsettled securities purchased by the Company and amountspayable for clearing costs and other settlement charges. This amount also includes the cash collateral received for securitiesloaned less cash collateral for securities borrowed. Any amounts payable would be fully collateralized by all of the securitiesowned by the Company and held on deposit at the clearing broker.
(n)Accounts Receivable
Accounts receivablerepresents amounts due from the Company’s Auction and Liquidation, Financial Consulting, Capital Markets, Principal Investments- United Online and magicJack and Brands customers. The Company maintains an allowance for doubtful accounts for estimated lossesinherent in its accounts receivable portfolio. In establishing the required allowance, management utilizes the expected loss model.Management also considers historical losses adjusted for current market conditions and the customers’ financial conditionand the current receivables aging and current payment patterns. Account balances are charged off against the allowance after allmeans of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balancesheet credit exposure related to its customers. The Company’s bad debt expense and changes in the allowance for doubtfulaccounts for the years ended December 31, 2020 and 2019 are included in Note 6.
(o)Leases
The Company determinesif an arrangement is, or contains, a lease at the inception date. Operating leases are included in right-of-use assets, with therelated liabilities included in operating lease liabilities in the consolidated balance sheet.
Operating leaseassets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation tomake lease payments arising from the lease. Operating lease assets and liabilities are recognized at the lease commencementdate based on the estimated present value of lease payments over the lease term. We use our estimated incremental borrowingrate in determining the present value of lease payments. Variable components of the lease payments such as fair market valueadjustments, utilities, and maintenance costs are expensed as incurred and not included in determining the present value. Ourlease terms include options to extend or terminate the lease when it is reasonably certain that we will exercise that option.Lease expense is recognized on a straight-line basis over the lease term. We have lease agreements with lease and non-leasecomponents which are accounted for as a single lease component. See Note 9 for additional information on leases.
| F- 14 |
(p)Property and Equipment
Propertyand equipment are stated at cost. Depreciation and amortization are computed using the straight-line method over the estimateduseful lives of the assets. Property and equipment held under finance leases are amortized on a straight-line basis over the shorterof the lease term or estimated useful life of the asset. Depreciation and amortization expense on property and equipment was $
(q)Loans Receivable
TheCompany adopted the new credit loss standard effective January 1, 2020. Pursuant to ASU 2016-13 and its amendment ASU 2019-05,the Company elected the irrevocable fair value option for all outstanding loans receivable that were previously measured at amortizedcost. Under the fair value option, loans receivable are measured at each reporting period based upon their exit value in an orderlytransaction and unrealized gains or losses from changes in fair value are recorded in the consolidated statements of income. Theseloans are no longer subject to evaluation for impairment through an allowance for loan loss as such losses will be captured throughfair value changes. The impact of adopting ASC 326 was immaterial to the consolidated financial statements.
Loansreceivable, at fair value totaled $
Priorto the adoption of the new credit loss standard effective January 1, 2020, at December 31, 2019 loans receivable, at historicalcost totaled $
TheCompany may periodically provide limited guarantees to third parties for loans that are made to investment banking and lendingcustomers. At December 31, 2020, the Company has provided limited guarantees with respect to the Franchise Group, Inc. (collectivelywith all of its affiliates, “FRG”) as further described in Note 21 and Babcock & Wilcox Enterprises, Inc. (“B&W”)as further described in Note 17(c). In accordance with the new credit loss standard, the Company evaluates the need to recordan allowance for credit losses for these loan guarantees since they have off-balance sheet credit exposures. At December31, 2020, the Company has not recorded any provision for credit losses on the FRG and B&W guarantees since the underlyingguaranteed loans are senior to most of the outstanding debt of FRG and B&W and the Company believes that there is sufficientcollateral to protect the Company from any credit loss exposure. The maximum amount of credit exposure related to theselimited guarantees is approximately $
Interestincome on loans receivable is recognized based on the stated interest rate of the loan on the unpaid principal balance plus theamortization of any costs, origination fees, premiums and discounts and is included in interest income - loans and securitieslending on the consolidated statement of income. Loan origination fees and certain direct origination costs are deferred and recognizedas adjustments to interest income over the lives of the related loans. Unearned income, discounts and premiums are amortized tointerest income using a level yield methodology.
(r)Securities and Other Investments Owned and Securities Sold Not Yet Purchased
Securitiesowned consist of equity securities including, common and preferred stocks, warrants, and options; corporate bonds; other fixedincome securities including, government and agency bonds; loans receivable valued at fair value; and investments in partnerships.Securities sold, but not yet purchased represents obligations of the Company to deliver the specified security at the contractedprice and thereby create a liability to purchase the security in the market at prevailing prices. Changes in the value of thesesecurities are reflected currently in the results of operations.
| F- 15 |
Asof December 31, 2020 and 2019, the Company’s securities and other investments owned and securities sold not yet purchasedat fair value consisted of the following securities:
| December 31, | December 31, | |||||||
| 2020 | 2019 | |||||||
| Securities and other investments owned: | ||||||||
| Equity securities | $ |
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$ |
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| Corporate bonds |
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| Other fixed income securities |
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| Partnership interests and other |
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| $ |
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$ |
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| Securities sold not yet purchased: | ||||||||
| Equity securities | $ |
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$ |
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| Corporate bonds |
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| Other fixed income securities |
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| $ |
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$ |
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(s) Goodwill and OtherIntangible Assets
The Company accountsfor goodwill and intangible assets in accordance with the accounting guidance which requires that goodwill and other intangibleswith indefinite lives be tested for impairment annually or on an interim basis if events or circumstances indicate that the fairvalue of an asset has decreased below its carrying value.
Goodwill includesthe excess of the purchase price over the fair value of net assets acquired in business combinations and the acquisition of noncontrollinginterests. ASC 350 requires that goodwill be tested for impairment at the reporting unit level (operating segment or one levelbelow an operating segment). Application of the goodwill impairment test requires judgment, including the identification of reportingunits, assigning assets and liabilities to reporting units, assigning goodwill to reporting units, and determining the fair value.The Company operates five reporting units, which are the same as its reporting segments described in Note 22. Significant judgmentis required to estimate the fair value of reporting units which includes estimating future cash flows, determining appropriatediscount rates and other assumptions. Changes in these estimates and assumptions could materially affect the determination offair value and/or goodwill impairment.
When testing goodwillfor impairment, in accordance with ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for GoodwillImpairment, the Company made a qualitative assessment of the impact of the COVID-19 outbreak on goodwill and other intangibleassets. Based on the Company’s qualitative assessments during 2020, the Company concluded that a positive assertion canbe made from the qualitative assessment that it is more likely than not that the fair value of the reporting units exceeded theircarrying values and no impairments were identified.
The Company reviewsthe carrying value of its amortizable intangibles and other long-lived assets for impairment at least annually or whenever eventsor changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-livedassets is measured by comparing the carrying amount of the asset or asset group to the undiscounted cash flows that the assetor asset group is expected to generate. If the undiscounted cash flows of such assets are less than the carrying amount, the impairmentto be recognized is measured by the amount by which the carrying amount of the asset or asset group, if any, exceeds its fairmarket value. During the year ended December 31, 2020, the Company determined that the COVID-19 outbreak was a triggering eventfor testing the indefinite-lived tradenames in the Brands segment during the first quarter and again in the second quarter anddetermined that the indefinite-lived tradenames in the Brands segment were impaired. As a result, the Company recognized impairmentcharges of $
| F- 16 |
(t) Fair Value Measurements
The Company’sassessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considersfactors specific to the asset or liability. Fair value is the price that would be received to sell an asset or paid to transfera liability in an orderly transaction between market participants at the measurement date. A fair value measurement assumes thatthe transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in theabsence of a principal market, the most advantageous market. In general, fair values determined by Level 1 inputs utilize quotedprices (unadjusted) for identical instruments that are highly liquid, observable and actively traded in over-the-counter markets.Fair values determined by Level 2 inputs utilize inputs other than quoted prices included in Level 1 that are observable for theasset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar instruments in active markets,quoted prices for identical or similar instruments in markets that are not active and model-derived valuations whose inputs areobservable and can be corroborated by market data. Level 3 inputs are unobservable inputs that are supported by little or no marketactivity and that are significant to the fair value of the assets or liabilities. In certain cases, the inputs used to measurefair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy withinwhich the fair value measurement in its entirety falls has been determined based on the lowest level input that is significantto the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to thefair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
The Company’ssecurities and other investments owned and securities sold and not yet purchased are comprised of equity securities including,common and preferred stocks, warrants, and options corporate bonds; other fixed income securities including, government and agencybonds; loans receivable valued at fair value; and investments in partnerships. Investments in equity securities that are basedon quoted prices in active markets are included in Level 1 of the fair value hierarchy. The Company also holds nonpublic equitysecurities for which there is little or no public market and fair value is determined by management on a consistent basis. Forinvestments where little or no public market exists, management’s determination of fair value is based on the best availableinformation which may incorporate management’s own assumptions and involves a significant degree of judgment, taking intoconsideration various factors including earnings history, financial condition, recent sales prices of the issuer’s securitiesand liquidity risks. These investments are included in Level 3 of the fair value hierarchy. Investments in partnership interestsinclude investments in private equity partnerships that primarily invest in equity securities, bonds, and direct lending funds.The Company also invests in priority investment funds and the underlying securities held by these funds are primarily corporateand asset-backed fixed income securities and restrictions exist on the redemption of amounts invested by the Company. The Company’spartnership and investment fund interests are valued based on the Company’s proportionate share of the net assets of thepartnerships and funds; the value for these investments are derived from the most recent statements received from the general partneror fund administrator. These partnership and investment fund interests are valued at net asset value (“NAV”) and areexcluded from the fair value hierarchy in the table below in accordance with ASC “Topic 820: Fair Value Measurements.”At December 31, 2020 and 2019, partnership and investment fund interests valued at NAV of $
Securities and otherinvestments owned also include investments in nonpublic entities that do not have a readily determinable fair value and do notreport NAV per share. These investments are accounted for using a measurement alternative under which they are measured at costand adjusted for observable price changes and impairments. Observable price changes result from, among other things, equity transactionsfor the same issuer executed during the reporting period, including subsequent equity offerings or other reported equity transactionsrelated to the same issuer. For these transactions to be considered observable price changes of the same issuer, we evaluate whetherthese transactions have similar rights and obligations, including voting rights, distribution preferences, conversion rights, andother factors, to the investments we hold. Any investments adjusted to their fair value by applying the measurement alternativeare disclosed as nonrecurring fair value measurements, including the level in the fair value hierarchy that was used. We had noinvestments measured at fair value on a nonrecurring basis for the years ended December 31, 2020 and 2019. At December 31, 2020,investments in nonpublic entities valued using a measurement alternative of $
The fair value of mandatorilyredeemable noncontrolling interests is determined based on the issuance of similar interests for cash, references to industrycomparables, and relied, in part, on information obtained from appraisal reports and internal valuation models.
| F- 17 |
The following tablespresent information on the financial assets and liabilities measured and recorded at fair value on a recurring basis as of December 31,2020 and 2019.
| Financial Assets and Liabilities Measured at Fair Value | ||||||||||||||||
| on a Recurring Basis at December 31, 2020 Using | ||||||||||||||||
| Quoted prices in | Other | Significant | ||||||||||||||
| Fair value at | active markets for | observable | unobservable | |||||||||||||
| December 31 | identical assets | inputs | inputs | |||||||||||||
| 2020 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
| Assets: | ||||||||||||||||
| Securities and other investments owned: | ||||||||||||||||
| Equity securities | $ |
|
$ |
|
$ | $ |
|
|||||||||
| Corporate bonds |
|
|
||||||||||||||
| Other fixed income securities |
|
|
||||||||||||||
| Total securities and other investments owned |
|
|
|
|
||||||||||||
| Loans receivable, at fair value |
|
|
||||||||||||||
| Total assets measured at fair value | $ |
|
$ |
|
$ |
|
$ |
|
||||||||
| Liabilities: | ||||||||||||||||
| Securities sold not yet purchased: | ||||||||||||||||
| Equity securities | $ |
|
$ |
|
$ | $ | ||||||||||
| Corporate bonds |
|
|
||||||||||||||
| Other fixed income securities |
|
|
||||||||||||||
| Total securities sold not yet purchased |
|
|
|
|||||||||||||
| Mandatorily redeemable noncontrolling interests issued after November 5, 2003 |
|
|
||||||||||||||
| Total liabilities measured at fair value | $ |
|
$ |
|
$ |
|
$ |
|
||||||||
| Financial Assets and Liabilities Measured at Fair Value | ||||||||||||||||
| on a Recurring Basis at December 31, 2019 Using | ||||||||||||||||
| Quoted prices in | Other | Significant | ||||||||||||||
| Fair value at | active markets for | observable | unobservable | |||||||||||||
| December 31 | identical assets | inputs | inputs | |||||||||||||
| 2019 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
| Assets: | ||||||||||||||||
| Securities and other investments owned: | ||||||||||||||||
| Equity securities | $ |
|
$ |
|
$ | $ |
|
|||||||||
| Corporate bonds |
|
|
||||||||||||||
| Other fixed income securities |
|
|
||||||||||||||
| Total securities and other investments owned |
|
|
|
|
||||||||||||
| Loans receivable, at fair value |
|
|
||||||||||||||
| Total assets measured at fair value | $ |
|
$ |
|
$ |
|
$ |
|
||||||||
| Liabilities: | ||||||||||||||||
| Securities sold not yet purchased: | ||||||||||||||||
| Equity securities | $ |
|
$ |
|
$ | $ | ||||||||||
| Corporate bonds |
|
|
||||||||||||||
| Other fixed income securities |
|
|
||||||||||||||
| Total securities sold not yet purchased |
|
|
|
|||||||||||||
| Mandatorily redeemable noncontrolling interests issued after November 5, 2003 |
|
|
||||||||||||||
| Total liabilities measured at fair value | $ |
|
$ |
|
$ |
|
$ |
|
||||||||
As of December 31, 2020and 2019, financial assets measured and reported at fair value on a recurring basis and classified within Level 3 were $
| F- 18 |
The following tablesummarizes the significant unobservable inputs in the fair value measurement of level 3 financial assets and liabilities by categoryof investment and valuation technique as of December 31, 2020:
| Fair value at | ||||||||||||
| December 31, | Weighted | |||||||||||
| 2020 | Valuation Technique | Unobservable Input | Range | Average | ||||||||
| Assets: | ||||||||||||
| Equity securities | $ |
|
|
|
|
|
||||||
|
|
|
|
||||||||||
|
|
|
|
||||||||||
|
|
|
|
|
|||||||||
| Loans receivable at fair value |
|
|
|
|
|
|||||||
|
|
|
|
|
|||||||||
| Total level 3 assets measured at fair value | $ |
|
||||||||||
| Liabilities: | ||||||||||||
| Mandatorily redeemable noncontrolling interests issued after November 5, 2003 | $ |
|
|
|
|
|
||||||
The changes in Level3 fair value hierarchy during the year ended December 31, 2020 and 2019 are as follows:
| Level 3 | Level 3 Changes During the Period | Level 3 | ||||||||||||||||||||||
| Balance at | Fair | Relating to | Purchases, | Transfer in | Balance at | |||||||||||||||||||
| Beginning of | Value | Undistributed | Sales and | and/or out | End of | |||||||||||||||||||
| Year | Adjustments | Earnings | Settlements | of Level 3 | Period | |||||||||||||||||||
| Year Ended December 31, 2020 | ||||||||||||||||||||||||
| Equity securities | $ |
|
$ |
(
|
) | $ | $ |
|
$ |
(
|
) | $ |
|
|||||||||||
| Loans receivable at fair value |
|
(
|
) |
|
|
|
|
|||||||||||||||||
| Mandatorily redeemable noncontrolling interests issued after November 5, 2003 |
|
|
|
|||||||||||||||||||||
| Year Ended December 31, 2019 | ||||||||||||||||||||||||
| Equity securities | $ |
|
$ |
(
|
) | $ |
|
$ |
|
$ |
(
|
) | $ |
|
||||||||||
| Loans receivable at fair value |
|
|
|
(
|
) |
|
||||||||||||||||||
| Mandatorily redeemable noncontrolling interests issued after November 5, 2003 |
|
(
|
) |
|
||||||||||||||||||||
The Company adoptedASU 2016-13 and its amendment ASU 2019-05 effective January 1, 2020. Pursuant to ASU 2016-13 and its amendment ASU 2019-05, theCompany elected the irrevocable fair value option for all outstanding loans receivable that were measured at amortized cost asof December 31, 2019. The loans receivable, at fair value are included in transfers into level 3 fair value assets in theabove table.
The amounts reportedin the table above for the years ended December 31, 2020 and 2019 include the amount of undistributed earnings attributable tothe noncontrolling interests that is distributed on a quarterly basis. The carrying amounts reported in the consolidated financialstatements for cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued expenses and otherliabilities approximate fair value based on the short-term maturity of these instruments.
As of December 31,2020, the senior notes payable had a carrying amount of $
During the yearsended December 31, 2020 and 2019, except for the impact of the intangible impairment charge as described in Note 8- Goodwilland Other Intangible Assets, there were no assets or liabilities measured at fair value on a non-recurring basis. The fairvalue of the indefinite-lived intangible assets was determined based on a discounted cash flow model using a rate of
(u)Derivative and Foreign Currency Translation
The Company periodicallyuses derivative instruments, which primarily consist of the purchase of forward exchange contracts, for certain loans receivableand Auction and Liquidation engagements with operations outside the United States. During the twelve months ended December 31,2020, the Company’s use of derivatives consisted of the purchase of forward exchange contracts in the amount of 12,700 Euros,of which 6,700 Euros were settled.
| F- 19 |
The forward exchangecontracts were entered into to improve the predictability of cash flows related to a retail store liquidation engagement and aloan receivable. The net loss from forward exchange contracts was $
The Company transactsbusiness in various foreign currencies. In countries where the functional currency of the underlying operations has been determinedto be the local country’s currency, revenues and expenses of operations outside the United States are translated into UnitedStates dollars using average exchange rates while assets and liabilities of operations outside the United States are translatedinto United States dollars using period-end exchange rates. The effects of foreign currency translation adjustments are includedin stockholders’ equity as a component of accumulated other comprehensive income in the accompanying consolidated balancesheets. Transaction (losses) gains were ($
(v)Common Stock Warrants
The Company issued
OnOctober 28, 2019, the Company issued
(w)Equity Investment
At December 31, 2020and 2019, equity investments of $
bebe stores, inc.
At December 31, 2020, theCompany had a
National Holdings Corporation
In 2018, the Company enteredinto an agreement to acquire shares of National Holdings Corporation (“National Holdings”), a Nasdaq-listed issuer,from Fortress Biotech, Inc. for an aggregate purchase price totaling approximately $
Other Equity Investments
The Company has other equityinvestments, the largest being a
| F- 20 |
As of December 31, 2020,the carrying values of the Company’s equity investment in bebe exceeded the fair value based on the quoted market prices.In consideration of these facts, the Company evaluated its investment for impairment. The Company did not utilize bright-line testsin the evaluation. Based on the available facts and information regarding the operating results of bebe, the Company’s abilityand intent to hold the investments until recovery, the relative amount of the declines, and the length of time that the fair valueswere less than the carrying values, the Company concluded that recognition of impairment losses in earnings was not required. However,the Company will continue to monitor the investment and it is possible that impairment losses will be recorded in earnings in futureperiods based on changes in facts and circumstances or intentions.
(x)Loan Participations Sold
As of December 31, 2020and 2019, the Company has sold investments to third parties (“Participants”) that are accounted for as secured borrowingsunder ASC Topic 860, Transfers and Servicing. Under ASC Topic 860, a partial loan transfer does not qualify for sale accountingin order for sale treatment to be allowed. A participation or other partial loan transfer that meets the definition of a participatinginterest is classified as loan receivable and the portion transferred is recorded as a secured borrowing under loan participationssold in the consolidated balance sheet. The Participants are entitled to payments made by the borrower of the related loan equalto the current loan participations sold outstanding at the interest rates for the respective investment. In the event that theborrower defaults, the Participants have rights to payments from such borrower, but do not have recourse to the Company. The termsof the loan participations sold are commensurate with the terms of the related loan.
As of December 31, 2020and 2019, the Company had entered into participation agreements for a total of $
(y)Supplemental Non-cash Disclosures
Duringthe year ended December 31, 2020, non-cash investing activities included $
Duringthe year ended December 31, 2019, non-cash activities included the conversion of loans receivable in the amount of $
(z) Reclassifications
As of December 31,2019, loans receivable recorded at fair value of $
For the yearsended December 31 2019 and 2018, $
(aa)Variable Interest Entity
The Company holdsinterests in certain variable interest entities (“VIEs”) that are not consolidated as the Company is not the primarybeneficiary. The Company determines whether it is the primary beneficiary of a VIE at the time it becomes involved with a VIE andreconsiders that conclusion at each reporting date. In evaluating whether the Company is the primary beneficiary, the Company evaluatesits economic interests in the entity held either directly by the Company or indirectly through related parties. The consolidationanalysis can generally be performed qualitatively; however, if it is not readily apparent that the Company is not the primary beneficiary,a quantitative analysis may also be performed.
In 2018, theoperations of GACP II, LP, a private debt investment limited partnership (the “Partnership”) commenced. The Company’sinvestment in the Partnership is a VIE since the unaffiliated limited partners do not have substantive kick-out or participatingrights to remove the Company’s subsidiary that is the general partner managing the Partnership. The Company has determinedthat it is not the primary beneficiary due to the fact that its fee arrangements are considered at-market and thus not deemed tobe variable interests, and it does not hold any other interests in the Partnership that are considered to be more than insignificant.
| F- 21 |
In November 2020,the Company formed Lingo Management, LLC (“Lingo”), a joint venture with an unaffiliated third party. Lingo is a VIEbecause the entity does not have enough equity at risk to finance its activities without additional subordinated financial support.The Company has determined that it is not the primary beneficiary because it does not have the power to direct the activities ofthe VIE that most significantly impact the entity’s financial performance. The Company’s variable interests in Lingoinclude loans receivable at fair value and an equity investment accounted for under the equity method of accounting.
The carrying valueof the Company’s investments in the VIEs that were not consolidated is shown below.
|
December 31,
2020 |
December 31,
2019 |
|||||||
| Partnership investments | $ |
|
$ |
|
||||
| Due from related party |
|
|
||||||
| Maximum exposure to loss | $ |
|
$ |
|
||||
(ab)Recent Accounting Standards
Notyet adopted
In December 2019,the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2019-12,Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This standard simplifies the accounting for income taxesby removing certain exceptions for recognizing deferred taxes on investments, performing intra-period allocations, and calculatingincome taxes in interim periods. The ASU also adds guidance to reduce the complexity in certain areas, including recognizing deferredtaxes for tax goodwill and allocating taxes to members of a consolidated group. The revised guidance will be applied prospectivelyand is effective for SEC filers for annual periods or interim periods with fiscal years beginning after December 15, 2020. Earlyadoption is permitted for interim or annual periods for which financial statements have not been issued. The Company is finalizingits assessment of the potential impact of this ASU and does not expect it to have any material impact on its consolidated resultsof operations, cash flows, financial position or disclosures.
InMarch 2020, FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848)” (“ASU 2020-04”), which providesoptional guidance for a limited period of time to ease potential accounting impacts associated with transitioning away from referencerates that are expected to be discontinued, such as the London Interbank Offered Rate ("LIBOR"). The amendments in ASU2020-04 apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expectedto be discontinued. The amendments in ASU 2020-04 are effective through December 31, 2022. The Company is currently assessing thepotential impacts the adoption of ASU 2020-04 may have on its consolidated results of operations, cash flows, financial positionor disclosures.
In August 2020, theFASB issued ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contractsin Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.This Update addresses issues identified as a result of the complexity associated with applying generally accepted accounting principles(GAAP) for certain financial instruments with characteristics of liabilities and equity. In addressing the complexity, the Boardfocused on amending the guidance on convertible instruments and the guidance on the derivatives scope exception for contracts inan entity’s own equity. For convertible instruments, the Board decided to reduce the number of accounting models for convertibledebt instruments and convertible preferred stock. Limiting the accounting models results in fewer embedded conversion featuresbeing separately recognized from the host contract as compared with current GAAP. In addition to eliminating certain accountingmodels, the ASU also provides guidance to enhance information transparency by making targeted improvements to the disclosures forconvertible instruments and earnings-per-share (EPS) guidance. Additionally, the ASU amends the guidance for the derivatives scopeexception for contracts in an entity’s own equity to reduce form-over-substance-based accounting conclusions, and to amendthe related EPS guidance. The amendments in this update are effective for public business entities for fiscal periods beginningafter December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, but no earlier thanfiscal years beginning after December 15, 2020. The Company has not yet adopted this update and is currently evaluating the effect,if any, this new standard will have on its financial condition and results of operations.
In October 2020, theFASB issued ASU 2020-08, Codification Improvements to Subtopic 310-20, Receivables-Nonrefundable Fees and Other Costs. The amendmentsin this Update clarify that an entity should reevaluate whether a callable debt security is within the scope of paragraph 310-20-35-33for each reporting period. The Update is intended to clarify the Codification and make the Codification easier to understand andeasier to apply by eliminating inconsistencies and providing clarifications. The amendments in this update are effective for publicbusiness entities for fiscal periods beginning after December 15, 2020, including interim periods within those fiscal years. Earlyadoption is not permitted. The Company has not yet adopted this update which is effective for the Company beginning January 1,2021. The Company has assessed the impact of this ASU and does not expect it to have any material impact on its consolidated resultsof operations, cash flows, financial position or disclosures.
| F- 22 |
In October 2020, theFASB issued ASU 2020-10, Codification Improvements. The Update contains amendments that improve the consistency of the Codificationby including all disclosure guidance in the appropriate Disclosure Section (Section 50). Many of the Amendments arose because theBoard provided an option to give certain information either on the face of the financial statements or in the notes to financialstatements and that option was only included in the Other Presentation Matters Section (Section 45) of the Codification. The optionto disclose information in the notes to financial statements should have been codified in the Disclosure section as well as theOther Presentation Matters Section (or other Section of the Codification in which the option to disclose in the notes to financialstatements appears). These amendments are not expected to change current practice but are intended to improve the Codificationby ensuring that all guidance that requires or provides an option for an entity to provide information in the notes to financialstatements is included in the Disclosure Section of the Codification, thus reducing the likelihood that the disclosure requirementwould be missed. The Board does not anticipate that the amendments will result in any changes to current GAAP. The amendments inthe Update are effective for annual periods beginning after December 15, 2020, for public business entities. Early applicationof the amendments is permitted for public business entities for any annual or interim period for which financial statements havenot been issued. The amendments in the Update should be applied retrospectively. The Company is finalizing its assessment of thepotential impact of this ASU and does not expect it to have any material impact on its consolidated results of operations, cashflows, financial position or disclosures.
Recentlyadopted
In June 2016, the FASBissued ASU 2016-13, Financial Instruments − Credit Losses (Topic 326): Measurementof Credit Losses on Financial Instruments (“ASC 326”). This standard requires an allowance to be recorded for all expectedcredit losses for certain financial assets. The new standard introduces an approach, based on expected losses, to estimate creditlosses on certain types of financial instruments. In May 2019, the FASB issued ASU No. 2019-05,Financial Instruments − Credit Losses (Topic 326); Targeted Transition Relief,” which allows entities to irrevocablyelect, upon adoption of ASU 2016-13, the fair value option on financial instruments that (1) were previously recorded at amortizedcost and (2) are within the scope of ASC 326-20 if the instruments are eligible for the fair value option under ASC 825-10. ASU2016-13 and ASU 2019-05 are effective for public companies for interim and annual period beginning December 15, 2019.
The Company adoptedthe new credit losses standard effective January 1, 2020. Pursuant to ASU 2016-13 and its amendment ASU 2019-05, the Company electedthe irrevocable fair value option for all outstanding loans receivable that were previously measured at amortized cost. Under thefair value option, loans receivable are now measured at each reporting period based upon their exit value in an orderly transactionand unrealized gains or losses from changes in fair value are recorded in the consolidated statements of income. These loans areno longer subject to evaluation for impairment through an allowance for loan loss as such losses will be captured through fairvalue changes. The impact of adopting ASC 326 was immaterial to the consolidated financial statements.
NOTE 3—ACQUISITIONS
MembershipInterest Purchase Agreement with BR Brand Acquisition LLC
On October 11,2019, the Company and B. Riley Brand Management LLC, an indirect wholly-owned subsidiary of the Company (the “B. RileyMember”), entered into a Membership Interest Purchase Agreement (the “MIPA”) with BR Brand Acquisition LLC(the “BR Brand Member”) and BR Brand, pursuant to which the B. Riley Member acquired a majority of the equity interestin BR Brand. The closing of the transactions in accordance with the MIPA (the “Closing”)occurred on October 28, 2019.
The B. Riley Membercompleted the Closing of a majority of the equity interest in BR Brands pursuant to the terms of the MIPA in exchange for (i) aggregateconsideration of $
In connection withthe Closing, (i) the BR Brands Member has caused the transfer of certain trademarks, domain names, license agreements and relatedassets from existing brand owners to BR Brands and (ii) the Company, Bluestar and certain of their affiliates (including the B.Riley Member and the BR Brand Member) entered into an amended and restated operating agreement for BR Brands and certain other commercialagreements.
| F- 23 |
The Company evaluatedthe transaction under the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)Topic 805, Business Combinations , and Accounting Standards Update (“ASU”) 2017-01, Business Combinations:Clarifying the Definition of a Business . Based on this evaluation, the Company has determined that the acquisition did notmeet the definition of a business and, therefore, has accounted for the transaction as an acquisition of assets. The fair valueof the assets acquired, including transaction costs, have been reflected in the accompanying financial statements as follows:
| Consideration paid by B. Riley: | ||||
| Cash acquisition consideration | $ |
|
||
| Transaction costs |
|
|||
| Total cash consideration |
|
|||
| Warrant consideration |
|
|||
| Total consideration | $ |
|
||
| Tangible assets acquired and assumed: | ||||
| Cash and cash equivalents | $ |
|
||
| Accounts receivable |
|
|||
| Deferred revenue |
(
|
) | ||
| Tradename |
|
|||
| Customer list |
|
|||
| Non-controlling interest |
(
|
) | ||
| Total | $ |
|
||
Acquisition ofmagicJack VocalTec Ltd
On November 14, 2018,the Company completed its acquisition of magicJack VocalTec Ltd., an Israeli corporation (“magicJack”), with magicJackcontinuing as the surviving corporation and as an indirect subsidiary of the Company. Each outstanding share of magicJack convertedinto the right to receive $
ProForma Financial Information
The unaudited pro-formafinancial information in the table below summarizes the combined results of operations of the Company and magicJack as though theacquisition had occurred as of January 1, 2018. The pro-forma financial information presented includes the effects of adjustmentsrelated to the amortization charges from the acquired intangible assets and the elimination of certain activities excluded fromthe transaction and transaction related costs. The pro forma financial information as presented below is for informational purposesonly and is not necessarily indicative of the results of operations that would have been achieved if the acquisition had takenplace at the beginning of the earliest period presented, nor does it intend to be a projection of future results.
|
Pro Forma
(Unaudited) |
||||
|
Year Ended
December 31, |
||||
| 2018 | ||||
| Revenues | $ |
|
||
| Net income attributable to B. Riley Financial, Inc. | $ |
|
||
| Basic earnings per share | $ |
|
||
| Diluted earnings per share | $ |
|
||
| Weighted average basic shares outstanding |
|
|||
| Weighted average diluted shares outstanding |
|
|||
NOTE 4—RESTRUCTURING CHARGE
The Company recorded restructuringcharges in the amount of $
| F- 24 |
The following tables summarize the changesin accrued restructuring charge during the years ended December 31, 2020, 2019 and 2018:
| Year Ended December 31, | ||||||||||||
| 2020 | 2019 | 2018 | ||||||||||
| Balance, beginning of year | $ |
|
$ |
|
$ |
|
||||||
| Restructuring charge |
|
|
|
|||||||||
| Cash paid |
(
|
) |
(
|
) |
(
|
) | ||||||
| Non-cash items |
(
|
) |
|
(
|
) | |||||||
| Balance, end of year | $ |
|
$ |
|
$ |
|
||||||
The following tables summarize the restructuringactivities by reportable segment during the years ended December 31, 2020, 2019 and 2018:
|
Capital
Markets |
Auction
and Liquidation |
Financial
Consulting |
Principal
Investments - United Online and magicJack |
Corporate | Total | |||||||||||||||||||
| Restructuring charges for the year ended December 31, 2020: | ||||||||||||||||||||||||
| Impairment of intangible assets | $ |
|
$ |
|
$ |
|
$ | $ | $ |
|
||||||||||||||
| Total restructuring charge | $ |
|
$ |
|
$ |
|
$ | $ | $ |
|
||||||||||||||
| Restructuring charges for the year ended December 31, 2019: | ||||||||||||||||||||||||
| Employee termination costs | $ | $ | $ | $ |
|
$ | $ |
|
||||||||||||||||
| Facility closure and consolidation charge (recovery) |
(
|
) |
|
|
||||||||||||||||||||
| Total restructuring charge | $ |
(
|
) | $ | $ | $ |
|
$ | $ |
|
||||||||||||||
| Restructuring charges for the year ended December 31, 2018: | ||||||||||||||||||||||||
| Employee termination costs | $ |
|
$ | $ | $ |
|
$ | $ |
|
|||||||||||||||
| Impairment of intangible assets |
|
|
||||||||||||||||||||||
| Facility closure and consolidation charge (recovery) |
|
(
|
) |
|
||||||||||||||||||||
| Total restructuring charge | $ |
|
$ | $ | $ |
|
$ |
(
|
) | $ |
|
|||||||||||||
NOTE 5—SECURITIES LENDING
The following table presentsthe contractual gross and net securities borrowing and lending balances and the related offsetting amount as of December31, 2020 and 2019:
|
Gross amounts
recognized |
Gross amounts
offset in the consolidated balance sheets (1) |
Net amounts
included in the consolidated balance sheets |
Amounts not
offset in the consolidated balance sheets but eligible for offsetting upon counterparty default (2) |
Net amounts | ||||||||||||||||
| As of December 31, 2020 | ||||||||||||||||||||
| Securities borrowed | $ |
|
$ | $ |
|
$ |
|
$ | ||||||||||||
| Securities loaned | $ |
|
$ | $ |
|
$ |
|
$ | ||||||||||||
| As of December 31, 2019 | ||||||||||||||||||||
| Securities borrowed | $ |
|
$ | $ |
|
$ |
|
$ | ||||||||||||
| Securities loaned | $ |
|
$ | $ |
|
$ |
|
$ | ||||||||||||
| (1) |
|
| (2) |
|
| F- 25 |
NOTE 6—ACCOUNTS RECEIVABLE
The components of accounts receivable, net, includethe following:
| December 31, | December 31, | |||||||
| 2020 | 2019 | |||||||
| Accounts receivable | $ |
|
$ |
|
||||
| Investment banking fees, commissions and other receivables |
|
|
||||||
| Unbilled receivables |
|
|
||||||
| Total accounts receivable |
|
|
||||||
| Allowance for doubtful accounts |
(
|
) |
(
|
) | ||||
| Accounts receivable, net | $ |
|
$ |
|
||||
Additions and changes to the allowance for doubtfulaccounts consist of the following:
| Year Ended December 31, | ||||||||||||
| 2020 | 2019 | 2018 | ||||||||||
| Balance, beginning of period | $ |
|
$ |
|
$ |
|
||||||
| Add: Additions to reserve |
|
|
|
|||||||||
| Less: Write-offs |
(
|
) |
(
|
) |
(
|
) | ||||||
| Less: Recovery |
(
|
) |
(
|
) | ||||||||
| Balance, end of period | $ |
|
$ |
|
$ |
|
||||||
Unbilled receivablesrepresent the amount of contractual reimbursable costs and fees for services performed in connection with fee and service basedauction and liquidation contracts.
NOTE 7—PROPERTY AND EQUIPMENT
Property and equipment,net, consists of the following:
| Estimated | December 31, | December 31, | ||||||||
| Useful Lives | 2020 | 2019 | ||||||||
| Leasehold improvements |
|
$ |
|
$ |
|
|||||
| Machinery, equipment and computer software |
|
|
|
|||||||
| Furniture and fixtures |
|
|
|
|||||||
| Total |
|
|
||||||||
| Less: Accumulated depreciation and amortization |
(
|
) |
(
|
) | ||||||
| $ |
|
$ |
|
|||||||
Depreciation expensewas $
| F- 26 |
NOTE 8—GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill was $
Thechanges in the carrying amount of goodwill for the years ended December 31, 2020 and 2019 wereas follows:
|
Capital
Markets Segment |
Auction and
Liquidation Segment |
Financial
Consulting Segment |
Principal
Investments- United Online and magicJack Segment |
Total | ||||||||||||||||
| Balance as of December 31, 2018 | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||
| Goodwill acquired during the year: | ||||||||||||||||||||
| magicJack purchase price adjustment |
|
|
||||||||||||||||||
| magicJack allocation to the sale of a division |
(
|
) |
(
|
) | ||||||||||||||||
| Balance as of December 31, 2019 |
|
|
|
|
|
|||||||||||||||
| Goodwill acquired during the year: | ||||||||||||||||||||
|
Acquisition of other business |
|
|
||||||||||||||||||
| Balance as of December 31, 2020 | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||
Intangible assets consisted ofthe following:
| As of December 31, 2020 | As of December 31, 2019 | |||||||||||||||||||||||||
| Useful Life |
Gross
Carrying Value |
Accumulated
Amortization |
Intangibles
Net |
Gross
Carrying Value |
Accumulated
Amortization |
Intangibles
Net |
||||||||||||||||||||
| Amortizable assets: | ||||||||||||||||||||||||||
| Customer relationships |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||
| Domain names |
|
|
|
|
|
|
|
|||||||||||||||||||
| Advertising relationships |
|
|
|
|
|
|
|
|||||||||||||||||||
| Internally developed software and other intangibles |
|
|
|
|
|
|
|
|||||||||||||||||||
| Trademarks |
|
|
|
|
|
|
|
|||||||||||||||||||
| Total |
|
|
|
|
|
|
||||||||||||||||||||
| Non-amortizable assets: | ||||||||||||||||||||||||||
| Tradenames |
|
|
|
|
||||||||||||||||||||||
| Total intangible assets | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||||||
Amortization expensewas $
In the first quarter of 2020, in accordance with ASU 2017-04,Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,
NOTE 9—LEASING ARRANGEMENTS
The Company’soperating lease assets primarily represent the lease of office space where the Company conducts its operations with the weightedaverage lease term of
For the year endedDecember 31, 2020, cash payments against operating lease liabilities totaled $
| F- 27 |
As of December 31,2020, maturities of operating lease liabilities were as follows:
| Operating | ||||
| Leases | ||||
| Year ending December 31: | ||||
| 2021 | $ |
|
||
| 2022 |
|
|||
| 2023 |
|
|||
| 2024 |
|
|||
| 2025 |
|
|||
| Thereafter |
|
|||
| Total lease payments |
|
|||
| Less: imputed interest |
(
|
) | ||
| Total operating lease liability | $ |
|
||
At December 31, 2020,the Company did not have any significant leases executed but not yet commenced.
NOTE 10—NOTES PAYABLE
Asset Based Credit Facility
OnApril 21, 2017, the Company amended its credit agreement (as amended, the “Credit Agreement”) governing its asset basedcredit facility with Wells Fargo Bank, National Association (“Wells Fargo Bank”) to increase the maximum borrowinglimit from $
We are in compliance withall financial covenants in the asset based credit facility at December 31, 2020.
Other Notes Payable
Notes payable include notespayable to a clearing organization for one of the Company’s broker dealers.
Also included in notespayable at December 31, 2020, was a $
| F- 28 |
NOTE 11—TERM LOAN
On December 19, 2018, BRPIAcquisition Co LLC (“BRPAC”), a Delaware limited liability company, UOL, and YMAX Corporation, Delaware corporations(collectively, the “Borrowers”), indirect wholly owned subsidiaries of the Company, in the capacity as borrowers, enteredinto a credit agreement (the “BRPAC Credit Agreement”) with the Banc of California, N.A. in the capacity as agent (the“Agent”) and lender and with the other lenders party thereto (the “Closing Date Lenders”). Certain of theBorrowers’ U.S. subsidiaries are guarantors of all obligations under the BRPAC Credit Agreement and are parties to the BRPACCredit Agreement in such capacity (collectively, the “Secured Guarantors”; and together with the Borrowers, the “CreditParties”). In addition, the Company and B. Riley Principal Investments, LLC, the parent corporation of BRPAC and a subsidiaryof the Company, are guarantors of the obligations under the BRPAC Credit Agreement pursuant to standalone guaranty agreements pursuantto which the shares outstanding membership interests of BRPAC are pledged as collateral.
The obligations under theBRPAC Credit Agreement are secured by first-priority liens on, and first priority security interest in, substantially all of theassets of the Credit Parties, including a pledge of (a) 100% of the equity interests of the Credit Parties, (b) 65% of the equityinterests in United Online Software Development (India) Private Limited, a private limited company organized under the laws ofIndia; and (c) 65% of the equity interests in magicJack VocalTec LTD., a limited company organized under the laws of Israel. Suchsecurity interests are evidenced by pledge, security and other related agreements.
The BRPAC Credit Agreementcontains certain covenants, including those limiting the Credit Parties’, and their subsidiaries’ ability to incurindebtedness, incur liens, sell or acquire assets or businesses, change the nature of their businesses, engage in transactionswith related parties, make certain investments or pay dividends. In addition, the BRPAC Credit Agreement requires the Credit Partiesto maintain certain financial ratios. The BRPAC Credit Agreement also contains customary representations and warranties, affirmativecovenants and events of default, including payment defaults, breach of representations and warranties, covenant defaults and crossdefaults. If an event of default occurs, the agent would be entitled to take various actions, including the acceleration of amountsdue under the outstanding BRPAC Credit Agreement.
Under BRPAC Credit Agreement,the Company borrowed $
On December 31, 2020,
| F- 29 |
As of December 31,2020, and 2019, the outstanding balance on the term loan was $
We are in compliancewith all financial covenants in the BRPAC Credit Agreement at December 31, 2020.
NOTE 12—SENIORNOTES PAYABLE
Senior notes payable, net,is comprised of the following as of December 31, 2020 and 2019:
| December 31, | December 31, | |||||||
| 2020 | 2019 | |||||||
|
|
|
|
||||||
|
|
|
|
||||||
|
|
|
|
||||||
|
|
|
|
||||||
|
|
|
|
||||||
|
|
|
|
||||||
|
|
|
|||||||
|
|
|
|||||||
| Less: Unamortized debt issuance costs |
(
|
) |
(
|
) | ||||
| $ |
|
$ |
|
|||||
Duringthe year ended December 31, 2020, the Company issued $
On February 12, 2020,the Company issued $
During March 2020, theCompany repurchased bonds with an aggregate face value of $
At December 31, 2020and 2019, the total senior notes outstanding was $
OnJanuary 25, 2021, the Company issued $
On March 1, 2021, the Company announced its intention to redeemat par, and at its option, $
Sales Agreement Prospectusto Issue Up to $
On February 14, 2020,the Company entered into a new At Market Issuance Sales Agreement (the “February 2020 Sales Agreement”) with B. RileySecurities, governing a program of at-the-market sales of certain of the Company’s senior notes. The most recent sales agreementprospectus was filed by us with the SEC on January 28, 2021 (the “January 2021 Sales Agreement Prospectus”). This programprovides for the sale by the Company of up to $
| F- 30 |
NOTE 13—REVENUE FROM CONTRACTS WITH CUSTOMERS
Revenue from contracts with customersby reportable segment for the years ended December 31, 2020 and 2019 is as follows:
|
Capital
Markets |
Auction and
Liquidation |
Financial
Consulting |
Principal
Investments - United Online and magicJack |
Brands | Total | |||||||||||||||||||
| Revenues for the year ended December 31, 2020: | ||||||||||||||||||||||||
| Corporate finance, consulting and investment banking fees | $ |
|
$ | $ |
|
$ | $ | $ |
|
|||||||||||||||
| Wealth and asset management fees |
|
|
||||||||||||||||||||||
| Commissions, fees and reimbursed expenses |
|
|
|
|
||||||||||||||||||||
| Subscription services |
|
|
||||||||||||||||||||||
| Service contract revenues |
|
|
||||||||||||||||||||||
| Advertising, licensing and other (1) |
|
|
|
|
||||||||||||||||||||
| Total revenues from contracts with customers |
|
|
|
|
|
|
||||||||||||||||||
| Interest income - Loans and securities lending |
|
|
||||||||||||||||||||||
| Trading gains on investments |
|
|
||||||||||||||||||||||
| Fair value adjustment on loans |
(
|
) |
(
|
) | ||||||||||||||||||||
| Other |
|
|
|
|||||||||||||||||||||
| Total revenues | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||||
| (1) Includes sale of goods of $25,663 in Auction Liquidation and $3,473 in Principal Investments - United Online and magicJack. | ||||||||||||||||||||||||
| Revenues for the year ended December 31, 2019: | ||||||||||||||||||||||||
| Corporate finance, consulting and investment banking fees | $ |
|
$ | $ |
|
$ | $ | $ |
|
|||||||||||||||
| Wealth and asset management fees |
|
|
||||||||||||||||||||||
| Commissions, fees and reimbursed expenses |
|
|
|
|
||||||||||||||||||||
| Subscription services |
|
|
||||||||||||||||||||||
| Service contract revenues |
(
|
) |
(
|
) | ||||||||||||||||||||
| Advertising, licensing and other (1) |
|
|
|
|
||||||||||||||||||||
| Total revenues from contracts with customers |
|
|
|
|
|
|
||||||||||||||||||
| Interest income - Loans and securities lending |
|
|
||||||||||||||||||||||
| Trading gains on investments |
|
|
||||||||||||||||||||||
| Fair value adjustment on loans |
|
|
||||||||||||||||||||||
| Other |
|
|
||||||||||||||||||||||
| Total revenues | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||||
| (1) Includes sale of goods of $4,220 in Auction Liquidation and $3,715 in Principal Investments - United Online and magicJack. | ||||||||||||||||||||||||
| F- 31 |
| Revenues for the year ended December 31, 2018: | ||||||||||||||||||||||||
| Corporate finance, consulting and investment banking fees | $ |
|
$ | $ |
|
$ | $ | $ |
|
|||||||||||||||
| Wealth and asset management fees |
|
|
||||||||||||||||||||||
| Commissions, fees and reimbursed expenses |
|
|
|
|
||||||||||||||||||||
| Subscription services |
|
|
||||||||||||||||||||||
| Service contract revenues |
|
|
||||||||||||||||||||||
| Advertising, licensing and other (1) |
|
|
|
|||||||||||||||||||||
| Total revenues from contracts with customers |
|
|
|
|
|
|||||||||||||||||||
| Interest income - Loans and securities lending |
|
|
||||||||||||||||||||||
| Trading losses on investments |
(
|
) |
(
|
) | ||||||||||||||||||||
| Other |
|
|
||||||||||||||||||||||
| Total revenues | $ |
|
$ |
|
$ |
|
$ |
|
$ | $ |
|
|||||||||||||
| (1) | Includes sale of goods of $63 in Auction Liquidation and$575 in Principal Investments - United Online and magicJack. |
Revenues are recognizedwhen control of the promised goods or performance obligations for services is transferred to the Company’s customers, inan amount that reflects the consideration the Company expects to be entitled to in exchange for the goods or services. A performanceobligation may be satisfied over time or at a point in time. Revenue from a performance obligation satisfied over time is recognizedby measuring the Company’s progress in satisfying the performance obligation in a manner that depicts the transfer of thegoods or services to the customer. Revenue from a performance obligation satisfied at a point in time is recognized at the pointin time that we determine the customer obtains control over the promised good or service. The amount of revenue recognized reflectsthe consideration we expect to be entitled to in exchange for those promised goods or services (i.e., the “transaction price”).In determining the transaction price, the Company considers multiple factors, including the effects of variable consideration.Variable consideration is included in the transaction price only to the extent it is probable that a significant reversal in theamount of cumulative revenue recognized will not occur when the uncertainties with respect to the amount are resolved. In determiningwhen to include variable consideration in the transaction price, the Company considers the range of possible outcomes, the predictivevalue of the Company’s past experiences, the time period of when uncertainties expect to be resolved and the amount of considerationthat is susceptible to factors outside of our influence, such as market volatility or the judgment and actions of third parties.Revenues by geographic region by segment is included in Note 22 – Business Segments.
| F- 32 |
The following providesdetailed information on the recognition of the Company’s revenues from contracts with customers:
Corporate finance,consulting and investment banking fees . Fees earned from corporate finance and investment banking services are derived fromdebt, equity and convertible securities offerings in which the Company acted as an underwriter or placement agent. Fees from underwritingactivities are recognized as revenues when the performance obligation for the services related to the underwriting transactionis satisfied under the terms of the engagement and is not subject to any other contingencies. Fees are also earned from financialadvisory and consulting services rendered in connection with client mergers, acquisitions, restructurings, recapitalizations andother strategic transactions. The performance obligation for financial advisory services is satisfied over time as work progresseson the engagement and services are delivered to the client. Fees earned from bankruptcy, financial advisory,forensic accounting and real estate consulting services are rendered to clients over time as work progresses on the engagementand services are delivered to the client. Fees may also include success and performance based fees which are recognized as revenuewhen the performance obligation is no longer constrained and it is not probable that the revenue recognized would be subject tosignificant reversal in a future period. The performance obligation for financial advisory services may also include successand performance based fees which are recognized as revenue when the performance obligation is no longer constrained and it is notprobable that the revenue recognized would be subject to significant reversal in a future period. Generally, it is probable thatthe revenue recognized is no longer subject to significant reversal upon the closing of the investment banking transaction.
Wealth and assetmanagement fees . Fees from wealth and asset management services consist primarily of investment management fees that are recognizedover the period the performance obligation for the services are provided. Investment management fees are primarily comprised offees for investment management services and are generally based on the dollar amount of the assets being managed.
Commissions, feesand reimbursed expenses . Commissions and other fees from clients for trading activities are earned from equity securities transactionsexecuted as agent or principal are recorded at a point in time on a trade date basis. Commission, fees and reimbursed expensesearned on the sale of goods at Auction and Liquidation sales are recognized when evidence of a contract or arrangement exists,the transaction price has been determined, and the performance obligation has been satisfied when control of the product and risksof ownership has been transferred to the buyer. Revenues from fees and reimbursed expenses for valuation services to clients arerecognized when the performance obligation is completed and is generally at the point in time upon delivery of the report to thecustomer.
Subscription services .Subscription service revenues derived from fees charged to UOL pay accounts and are recognized in the period in which the transactionprice has been determinable and the related performance obligations for services are provided to the customer. The Company’spay accounts generally pay in advance for their services by credit card, PayPal, automated clearinghouse or check, and revenuesare then recognized ratably over the service period. Subscription service revenues from magicJack include (a) revenues for initialaccess rights, which are recognized ratably over the service term, (b) revenues from access rights renewal, which are recognizedratably over the extended access right period; (c) revenues from access and wholesale charges, which are recognized as calls areterminated to the network; (d) revenues from UCaaS services, which are recognized in the period the services are provided overthe term of the customer agreements; and (e) prepaid international long distance minutes, which are recognized as the minutes areused or expired.
Service contractrevenues . Service contract revenues are primarily earned from Auction and Liquidation services contracts where the Companyguarantees a minimum recovery value for goods being sold at auction or liquidation are recognized over time when the performanceobligation is satisfied. The Company generally uses the cost-to-cost measure of progress for its contracts because it best depictsthe transfer of services to the customer which occurs as the Company incurs costs on its contracts. Under the cost-to-cost measureof progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimatedcosts at completion of the performance obligation. Revenues, including estimated fees or profits, are recorded proportionally ascosts are incurred. Costs to fulfill the contract include labor and other direct costs incurred by the Company related to the contract.Due to the nature of the guarantees and performance obligations under these contracts, the estimation of revenue that is ultimatelyearned is complex and subject to many variables and requires significant judgment. It is common for these contracts to containprovisions that can either increase or decrease the transaction price upon completion of our performance obligations under thecontract. Estimated amounts are included in the transaction price at the most likely amount it is probable that a significant reversalof revenue will not occur. The Company’s estimates of variable consideration and determination of whether or not to includeestimated amounts in the transaction price are based on an assessment of its anticipated performance under the contract takinginto consideration all historical, current and forecasted information that is reasonably available to the Company.
If the Company determinesthat the variable consideration used in the initial determination of the transaction price for the contract is such that the totalrecoveries from the auction or liquidation will not exceed the guaranteed recovery values or advances made in accordance with thecontract, the transaction price will be reduced and a loss or negative revenue could result from the performance obligation. Aprovision for the entire loss as negative revenue on the performance obligation is recognized in the period the loss is determined.Negative revenue from one retail liquidation engagement contributed to the Company reporting negative service contract revenuesof $
| F- 33 |
Advertising, licensingand other . Advertising and other revenues consist primarily of amounts from UOL’s Internet search partner that are generatedas a result of users utilizing the partner’s Internet search services and amounts generated from display advertisements,the portion of revenues from the sale of magicJack devices that is allocated to hardware, as well as revenues from magicJack ancillaryproducts and mobile broadband service devices to customers, and amounts from the sale of goods acquired in Auction andLiquidation asset purchase agreements. Advertising revenues are recognized in the period in which the advertisementis displayed or, for performance-based arrangements, when the related performance criteria are met. In determining whether an arrangementexists, the Company ensures that a written contract is in place, such as a standard insertion order or a customer-specific agreement.The Company assesses whether performance criteria have been met and whether the transaction price is determinable based on a reconciliationof the performance criteria and the payment terms associated with the transaction. The reconciliation of the performance criteriagenerally includes a comparison of customer-provided performance data to the contractual performance obligation and to internalor third-party performance data in circumstances where that data is available. Revenues from the hardware portion of the sale ofmagicJack devices are recognized upon delivery (when control transfers to the customer). Revenues from the sale of other magicJackrelated products are recognized at the time of sale. Sale of product revenues also include the related shipping and handling andinstallment fees, if applicable. Revenues from the sale of goods acquired in Auction and Liquidationasset purchase agreements are recognized when control of the product and risks of ownership has been transferred to the buyer.
Licensing revenueresults from various license agreements that provide revenue based on guaranteed minimum royalty amounts and advertising/marketingfees with additional royalty revenue based on a percentage of defined sales. Guaranteed minimum royalty amounts are recognizedas revenue on a straight-line basis over the full contract term. Royalty payments exceeding the guaranteed minimum amounts in aspecific contract year are recognized only subsequent to when the guaranteed minimum amount has been achieved. Other licensingfees are recognized at a point in time once the performance obligations have been satisfied.
Payments receivedas consideration for the grant of a license are recorded as deferred revenue at the time payment is received and recognized ratablyas revenue over the term of the license agreement. Advanced royalty payments are recorded as deferred revenue at the time paymentis received and recognized as revenue when earned. Revenue is not recognized unless collectability is probable.
Information on Remaining Performance Obligations and RevenueRecognized from Past Performance
The Company does notdisclose information about remaining performance obligations pertaining to contracts that have an original expected duration ofone year or less. The transaction price allocated to remaining unsatisfied or partially unsatisfied performance obligation(s) withan original expected duration exceeding one year was not material at December 31, 2020. Corporate finance and investment bankingfees and retail liquidation engagement fees that are contingent upon completion of a specific milestone and fees associated withcertain distribution services are also excluded as the fees are considered variable and not included in the transaction price atDecember 31, 2020.
Contract Balances
The timing of the Company’srevenue recognition may differ from the timing of payment by its customers. The Company records a receivable when revenue is recognizedprior to payment and the Company has an unconditional right to payment. Alternatively, when payment precedes the provision of therelated services, the Company records deferred revenue until the performance obligation(s) are satisfied. Receivables related torevenues from contracts with customers totaled $
During the years ended December 31, 2020 and 2019, the Company recognized revenue of $38,330 and $39,885 that was recorded as deferredrevenue at the beginning of the respective year.
Contract Costs
Contract costs include:(1) costs to fulfill contracts associated with corporate finance and investment banking engagements are capitalized where the revenueis recognized at a point in time and the costs are determined to be recoverable; (2) costs to fulfill Auction and Liquidation servicescontracts where the Company guarantees a minimum recovery value for goods being sold at auction or liquidation where the revenueis recognized over time when the performance obligation is satisfied; and (3) commissions paid to obtain magicJack contracts whichare recognized ratably over the contract term and third party support costs for magicJack and related equipment purchased by customerswhich are recognized ratably over the service period.
| F- 34 |
The capitalized coststo fulfill a contract were $
NOTE 14—INCOME TAXES
The Company’sprovision for income taxes consists of the following for the years ended December 31, 2020, 2019 and 2018:
| Year Ended December 31, | ||||||||||||
| 2020 | 2019 | 2018 | ||||||||||
| Current: | ||||||||||||
| Federal | $ |
|
$ |
|
$ |
|
||||||
| State |
|
|
|
|||||||||
| Foreign |
|
|
(
|
) | ||||||||
| Total current provision |
|
|
|
|||||||||
| Deferred: | ||||||||||||
| Federal |
|
|
|
|||||||||
| State |
|
|
|
|||||||||
| Foreign |
|
— |
|
|||||||||
| Total deferred |
|
|
|
|||||||||
| Total provision for income taxes | $ |
|
$ |
|
$ |
|
||||||
A reconciliationof the federal statutory rate of
| Year Ended December 31, | ||||||||||||
| 2020 | 2019 | 2018 | ||||||||||
| Provision for income taxes at federal statutory rate |
|
% |
|
% |
|
% | ||||||
| State income taxes, net of federal benefit |
|
|
|
|||||||||
| Transaction expenses | — | — |
|
|||||||||
| Noncontrolling interest tax differential |
(
|
) |
(
|
) |
(
|
) | ||||||
| Employee stock based compensation |
(
|
) |
(
|
) |
(
|
) | ||||||
| Other |
|
|
|
|||||||||
| Effective income tax rate |
|
% |
|
% |
|
% | ||||||
| F- 35 |
Deferred income taxassets (liabilities) consisted of the following as of December 31, 2020 and 2019:
| December 31, | ||||||||
| 2020 | 2019 | |||||||
| Deferred tax assets: | ||||||||
| Accrued liabilities and other | $ |
|
$ |
|
||||
| Mandatorily redeemable noncontrolling interests |
|
|
||||||
| Other |
|
|||||||
| State taxes |
|
|||||||
| Share based payments |
|
|||||||
| Foreign tax and other tax credit carryforwards |
|
|
||||||
| Capital loss carryforward |
|
|
||||||
| Net operating loss carryforward |
|
|
||||||
| Total deferred Tax Assets |
|
|
||||||
| Deferred tax liabilities: | ||||||||
| Deductible goodwill and other intangibles |
(
|
) |
(
|
) | ||||
| State taxes |
(
|
) | ||||||
| Share based payments |
(
|
) | ||||||
| Depreciation |
(
|
) |
|
|||||
| Deferred revenue |
(
|
) |
(
|
) | ||||
| Other |
(
|
) | ||||||
| Total deferred tax liabilities |
(
|
) |
(
|
) | ||||
| Net deferred tax assets |
|
|
||||||
| Valuation allowance |
(
|
) |
(
|
) | ||||
| Net deferred tax (liabilities) assets | $ |
(
|
) | $ |
|
|||
| Deferred tax assets, net | $ |
|
$ |
|
||||
| Deferred tax liabilities, net |
(
|
) | ||||||
| Net deferred tax (liabilities) assets | $ |
(
|
) | $ |
|
|||
The Company’s incomebefore income taxes of $
The Company establishesa valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of thedeferred tax assets will not be realized. Tax benefits of operating loss, capital loss and tax credit carryforwards are evaluatedon an ongoing basis, including a review of historical and projected future operating results, the eligible carryforward period,and other circumstances. The Company’s net operating losses are subject to annual limitations in accordance with InternalRevenue Code Section 382. Accordingly, the Company is limited to the amount of net operating loss that may be utilized in futuretaxable years depending on the Company’s actual taxable income. As of December 31, 2020, the Company believes that the existingnet operating loss carryforwards will be utilized in future tax periods before the loss carryforwards expire and it is more-likely-than-notthat future taxable earnings will be sufficient to realize its deferred tax assets and has not provided a valuation allowance.The Company does not believe that it is more likely than not that the Company will be able to utilize the benefits related to capitalloss carryforwards and has provided a valuation allowance in the amount of $
| F- 36 |
At December 31, 2020,the Company had gross unrecognized tax benefits totaling $
| Year Ended | ||||
| December 31, | ||||
| 2020 | ||||
| Beginning balance | $ |
|
||
| Additions for current year tax positions |
|
|||
| Additions for prior year tax positions |
|
|||
| Reductions for prior year tax positions |
(
|
) | ||
| Reductions due to lapse in statutes of limitations |
(
|
) | ||
| Ending balance | $ |
|
||
The Company filesincome tax returns in the U.S., various state and local jurisdictions, and certain other foreign jurisdictions. The Company iscurrently under audit by certain federal, state and local, and foreign tax authorities. The audits are in varying stages of completion.The Company evaluates its tax positions and establishes liabilities for uncertain tax positions that may be challenged by tax authorities.Uncertain tax positions are reviewed on an ongoing basis and are adjusted in light of changing facts and circumstances, includingprogress of tax audits, case law developments and closing of statutes of limitations. Such adjustments are reflected in the provisionfor income taxes, as appropriate. The Company is currently open to audit under the statute of limitations by the Internal RevenueService for the calendar years ended December 31, 2017 to 2020.
At December 31, 2020,the Company believes it is reasonably possible that its gross liabilities for unrecognized tax benefits may decrease by approximately$
The Company had accruedinterest and penalties relating to uncertain tax positions of $620 and $4,696 for UOL and magicJack, respectively, for the yearended December 31, 2020 all of which was included in income taxes payable. The Company recorded a benefit of $166 for UOL relatedto interest and penalties for uncertain tax positions primarily due to the lapse in statute of limitations.
NOTE 15—EARNINGS PER SHARE
Basic earnings per shareis calculated by dividing net income by the weighted-average number of shares outstanding during the period. Diluted earnings pershare is calculated by dividing net income by the weighted-average number of common shares outstanding, after giving effect toall dilutive potential common shares outstanding during the period. Basic common shares outstanding exclude
Basic and diluted earnings per share werecalculated as follows:
| Year Ended December 31, | ||||||||||||
| 2020 | 2019 | 2018 | ||||||||||
| Net income attributable to B. Riley Financial, Inc. | $ |
|
$ |
|
$ |
|
||||||
| Preferred stock dividends |
(
|
) |
(
|
) | ||||||||
| Net income applicable to common shareholders | $ |
|
$ |
|
$ |
|
||||||
| Weighted average common shares outstanding: | ||||||||||||
| Basic |
|
|
|
|||||||||
| Effect of dilutive potential common shares: | ||||||||||||
| Restricted stock units and warrants |
|
|
|
|||||||||
| Contingently issuable shares |
|
|
||||||||||
| Diluted |
|
|
|
|||||||||
| Basic income per common share | $ |
|
$ |
|
$ |
|
||||||
| Diluted income per common share | $ |
|
$ |
|
$ |
|
||||||
| F- 37 |
NOTE 16—LIMITED LIABILITY COMPANYSUBSIDIARIES
(a) Operating Agreementsof Limited Liability Company Subsidiaries
The Company has certainsubsidiaries that are organized as limited liability companies, each of which has its own separate operating agreement. Generally,each of these subsidiaries is managed by an individual manager who is a member or employee of the subsidiary, although the managermay not take certain actions unless the majority member of the subsidiary consents to the action. These actions include, amongothers, the dissolution of the subsidiary, the disposition of all or a substantial part of the subsidiary’s assets not inthe ordinary course of business, filing for bankruptcy, and the purchase by the subsidiary of one of the members’ ownershipinterest upon the occurrence of certain events. Certain of the members with a minority ownership interest in the subsidiaries areentitled to receive guaranteed payments in the form of compensation or draws, in addition to distributions of available cash fromtime to time. Distributions of available cash are generally made to each of the members in accordance with their respective ownershipinterests in the subsidiary after repayment of any loans made by any members to such subsidiary, and allocations of profits andlosses of the subsidiary are generally made to members in accordance with their respective ownership interests in the subsidiary.The operating agreements also generally place restrictions on the transfer of the members’ ownership interests in the subsidiariesand provide the Company or the other members with certain rights of first refusal and drag along and tag along rights in the eventof any proposed sales of the members’ ownership interests.
Generally, a memberof the subsidiary who materially breaches the operating agreement of the subsidiary, which breach has a direct, substantial andadverse effect on the subsidiary and the other members, or who is convicted of a felony (or a lesser crime of moral turpitude)involving his management of or involvement in the affairs of the subsidiary, or a material act of dishonesty of the member involvinghis management of or involvement in the affairs of the subsidiary, shall forfeit his entire ownership interest in the subsidiary.
(b) Repurchase Obligationsof Membership Interests of Limited Liability Company Subsidiaries
The operating agreementsof the Company’s limited liability company subsidiaries require the Company to repurchase the entire ownership interest ofeach the members upon the death of a member, disability of a member as defined in the operating agreement, or upon declarationby a court of law that a member is mentally unsound or incompetent. Upon the occurrence of one of these events, the Company isrequired to repurchase the member’s ownership interest in an amount equal to the fair market value of the member’snoncontrolling interest in the subsidiary.
The Company evaluatedthe classification of all of its limited liability company members’ ownership interests in accordance with the accountingguidance for financial instruments with characteristics of liabilities and equity. This guidance generally provides for the classificationof members’ ownership interests that are subject to mandatory redemption obligations to be classified outside of equity.In accordance with this guidance, all members with a minority ownership interest in these subsidiaries are classified as liabilitiesand included in mandatorily redeemable noncontrolling interests in the accompanying consolidated balance sheets. Members of thesesubsidiaries with a minority ownership interest issued before November 5, 2003 are stated on a historical cost basis and membersof the Company’s subsidiaries with a minority ownership interests issued on or after November 5, 2003 are stated at fairvalue at each balance sheet date. The Company deems such repurchase obligations, which are payable to members who are also employeesof these subsidiaries, to be a compensatory benefit. Accordingly, the changes in the historical cost basis and the changes in thefair value of the respective members’ ownership interests (noncontrolling interests) are recorded as a component of selling,general and administrative expenses in the accompanying consolidated statements of income.
The noncontrolling interestsshare of net income was $
NOTE 17—COMMITMENTS AND CONTINGENCIES
(a) Legal Matters
The Company is subjectto certain legal and other claims that arise in the ordinary course of its business. In particular, the Company and its subsidiariesare named in and subject to various proceedings and claims arising primarily from the Company’s securities business activities,including lawsuits, arbitration claims, class actions, and regulatory matters. Some of these claims seek substantial compensatory,punitive, or indeterminate damages. The Company and its subsidiaries are also involved in other reviews, investigations, and proceedingsby governmental and self-regulatory organizations regarding the Company’s business, which may result in adverse judgments,settlements, fines, penalties, injunctions, and other relief. In view of the number and diversity of claims against the Company,the number of jurisdictions in which litigation is pending, and the inherent difficulty of predicting the outcome of litigationand other claims, the Company cannot state with certainty what the eventual outcome of pending litigation or other claims willbe. Notwithstanding this uncertainty, the Company does not believe that the results of these claims are likely to have a materialeffect on its financial position or results of operations.
| F- 38 |
On January 5, 2017,complaints filed in November 2015 and May 2016 naming MLV & Co. (“MLV”), a broker-dealer subsidiary of B.Riley Securities (fka FBR), as a defendant in putative class action lawsuits alleging claims under the Securities Act, in connectionwith the offerings of Miller Energy Resources, Inc. (“Miller”) have been consolidated. The Master Consolidated Complaint,styled Gaynor v. Miller et al., is pending in the United States District Court for the Eastern District of Tennessee, and, likeits predecessor complaints, continues to allege claims under Sections 11 and 12 of the Securities Act against nine underwritersfor alleged material misrepresentations and omissions in the registration statement and prospectuses issued in connection withsix offerings (February 13, 2013; May 8, 2013; June 28, 2013; September 26, 2013; October 17, 2013 (as to MLV only) and August21, 2014) with an alleged aggregate offering price of approximately $
(b) FranchiseGroup Commitments and Loan Participant Guaranty
PSP Commitment
On January 23, 2021,the Company committed up to $
The Loan ParticipantGuaranty
On February 14, 2020,FRG, the lenders from time to time party thereto and GACP Finance as administrative agent, entered into a Credit Agreement (the“Term Loan Credit Agreement”), pursuant to which the lenders provided a term loan facility to FRG in an aggregate principalamount of $
The Loan ParticipantGuaranteed Obligations are unsecured obligations of the Company and rank equally in right of payment with all of the Company’sother existing and future unsecured and unsubordinated indebtedness. The Loan Participant Guaranteed Obligations are effectivelysubordinated in right of payment to all of the Company’s existing and future secured indebtedness and structurally subordinatedto all existing and future indebtedness of the Company’s subsidiaries, including trade payables.
| F- 39 |
(c) Babcock &Wilcox Commitments and Guarantee
On May 14, 2020, theCompany entered into an agreement to provide Babcock & Wilcox Enterprises, Inc. (“B&W”) future commitmentsto loan B&W up to $
On August 10, 2020,the Company entered into a project specific indemnity rider (the “Indemnity Rider”) in favor of Berkley Insurance Companyand/or Berkley Regional Insurance Company (collectively, “Berkley”) to a general agreement of indemnity made by B&Win favor of Berkley (the Indemnity Agreement”). Pursuant to the Indemnity Rider, the Company agreed to indemnify Berkleyin connection with a default by B&W under the Indemnity Agreement relating to a $
(d) BRPM II EquityCommitment Letter
The Company was aparty to an Equity Commitment Letter with B. Riley Principal Merger Corp. II (“BRPM II”) and B. Riley Principal SponsorCo. II, LLC to provide $
(e) Other Commitments
On June 19, 2020,the Company participated in a loan facility agreement to provide a total loan commitment up to
NOTE 18—SHARE-BASED PAYMENTS
(a)Amended and Restated 2009 Stock Incentive Plan
Share- based compensationexpense for restricted stock units under the Company’s Amended and Restated 2009 Stock Incentive Plan (the “Plan”)was $
The restricted stock unitsgenerally vest over a period of one to three years based on continued service. Performance based restricted stock units generallyvest based on both the employee’s continued service and the Company’s common stock price, as defined in the grant,achieving a set threshold during the three-year period following the grant. Indetermining the fair value of restricted stock units on the grant date, the fair value is adjusted for (a) estimated forfeitures,(b) expected dividends based on historical patterns and the Company’s anticipated dividend payments over the expected holdingperiod and (c) the risk-free interest rate based on U.S. Treasuries for a maturity matching the expected holding period.
As of December 31,2020, the expected remaining unrecognized share-based compensation expense of $
A summary of equityincentive award activity for the years ended December 31, 2020 and 2019 was as follows:
| Shares |
Weighted
Average Fair Value |
|||||||
| Nonvested at December 31, 2018 |
|
$ |
|
|||||
| Granted |
|
|
||||||
| Vested |
(
|
) |
|
|||||
| Forfeited |
(
|
) |
|
|||||
| Nonvested at December 31, 2019 |
|
$ |
|
|||||
| Granted |
|
|
||||||
| Vested |
(
|
) |
|
|||||
| Forfeited |
(
|
) |
|
|||||
| Nonvested at December 31, 2020 |
|
$ |
|
|||||
Theper-share weighted average grant-date fair value of restricted stock units granted during the years ended December 31, 2020and 2019 was $
OnFebruary 17, 2021,
| F- 40 |
(b)Amended and Restated FBR & Co. 2006 Long-Term Stock Incentive Plan
Inconnection with the acquisition of FBR & Co. on June 1, 2017, the equity awards previously granted or available for issuanceunder the FBR & Co. 2006 Long-Term Stock Incentive Plan (the “FBR Stock Plan”) may be issued under the Plan.During the year ended December 31, 2020, the Company granted restricted stock units representing
A summary of equityincentive award activity for the years ended December 31, 2020 and 2019 was as follows:
| Shares |
Weighted
Average Fair Value |
|||||||
| Nonvested at December 31, 2018 |
|
$ |
|
|||||
| Granted |
|
|
||||||
| Vested |
(
|
) |
|
|||||
| Forfeited |
(
|
) |
|
|||||
| Nonvested at December 31, 2019 |
|
$ |
|
|||||
| Granted |
|
|
||||||
| Vested |
(
|
) |
|
|||||
| Forfeited |
(
|
) |
|
|||||
| Nonvested at December 31, 2020 |
|
$ |
|
|||||
Theper-share weighted average grant-date fair value of restricted stock units granted during the years ended December 31, 2020and 2019 was $
NOTE 19—BENEFIT PLANS AND CAPITALTRANSACTIONS
(a) Employee Benefit Plans
The Company maintainsqualified defined contribution 401(k) plans, which cover substantially all of its U.S. employees. Under the plans, participantsare entitled to make pre-tax contributions up to the annual maximums established by the Internal Revenue Service. The plan documentspermit annual discretionary contributions from the Company. Employer contributions in the amount of $
In connection with the Company’sEmployee Stock Purchase Plan, share based compensation was $
(b) CommonStock
Duringthe year ended December 31, 2020, the Company repurchased
OnOctober 30, 2018, the Company’s Board of Directors authorized a share repurchase program of up to $
| F- 41 |
On March
15
,2018, the Company was a party to a secondary stock purchase agreement with ACP BD Investments, LLC (“ACP”) which requiredus to purchase
OnJanuary 15, 2021, the Company issued
(c) Preferred Stock
On October 7, 2019,
During the years endedDecember 31, 2020, and December 31, 2019, the Company issued depository shares equivalent to
OnSeptember 4, 2020,
Duringthe year ended December 31, 2020, the Company issued depository shares equivalent to
The Series A PreferredStock and the Series B Preferred Stock ranks, as to dividend rights and rights upon the Company’s liquidation, dissolutionor winding up: (i) senior to all classes or series of the Company’s common stock and to all other equity securities issuedby the Company other than equity securities issued with terms specifically providing that those equity securities rank on a paritywith the Series A Preferred Stock or Series B Preferred Stock, (ii) junior to all equity securities issued by the Company withterms specifically providing that those equity securities rank senior to the Series A Preferred Stock and the Series B PreferredStock with respect to payment of dividends and the distribution of assets upon the Company’s liquidation, dissolution orwinding up and (iii) effectively junior to all of the Company’s existing and future indebtedness (including indebtednessconvertible into our common stock or preferred stock) and to the indebtedness and other liabilities of (as well as any preferredequity interests held by others in) the Company’s existing or future subsidiaries. Generally, the Series A Preferred Stockand the Series B Preferred Stock is not redeemable by the Company prior to October 7, 2024. However, upon a change of control ordelisting event, the Company will have the special option to redeem the Series A Preferred Stock and the Series B Preferred Stock.
(d) Dividends
From time to time,the Company may decide to pay dividends which will be dependent upon our financial condition and results of operations. On February25, 2021, the Board of Directors announced an increase to the regular quarterly dividend from $
| F- 42 |
A summary of our commonstock dividend activity for the years ended December 31, 2020 and 2019 was as follows:
| Date Declared | Date Paid |
Stockholder
Record Date |
Regular
Dividend Amount |
Special
Dividend Amount |
Total
Dividend Amount |
|||||||||||
|
|
November 24, 2020 |
|
$ |
|
$ |
|
$ |
|
||||||||
|
|
August 28, 2020 |
|
|
|
|
|||||||||||
|
|
June 10, 2020 |
|
|
|
|
|||||||||||
|
|
March 31, 2020 |
|
|
|
|
|||||||||||
|
|
November 26, 2019 |
|
|
|
|
|||||||||||
|
|
August 29, 2019 |
|
|
|
|
|||||||||||
|
|
May 29, 2019 |
|
|
|
|
|||||||||||
|
|
March 26, 2019 |
|
|
|
|
|||||||||||
Holdersof Series A Preferred Stock,
Our principal sourcesof liquidity to finance our business is our existing cash on hand, cash flows generated from operating activities, funds availableunder revolving credit facilities and special purpose financing arrangements.
NOTE 20—NET CAPITAL REQUIREMENTS
B. Riley Securitiesand B. Riley Wealth Management (“BRWM”), the Company’s broker-dealer subsidiaries, are registered with the SECas broker-dealers and are members of the Financial Industry Regulatory Authority, Inc. (“FINRA”). The Company’sbroker-dealer subsidiaries are subject to SEC Uniform Net Capital Rule (Rule 15c3-1) which requires the subsidiaries to maintainminimum net capital and that the ratio of aggregate indebtedness to net capital, both as defined, shall not exceed 15 to 1. Asof December 31, 2020, B. Riley Securities had net capital of $
NOTE 21—RELATED PARTY TRANSACTIONS
At December 31, 2020, amountsdue from related parties of $
| F- 43 |
At December 31, 2020, theCompany had sold loan participations to BRC Partners Opportunity Fund, LP (“BRCPOF”), a private equity fund managedby one of its subsidiaries, in the amount of $
OnApril 1, 2019,
BRPM II
On May 22, 2020, theCompany earned $
In order to help meetthe condition under the Merger Agreement that BRPM II maintain a certain level of cash available upon the closing (before takinginto account certain transaction expenses), the Company entered into an Equity Commitment Letter with BRPM II and B. Riley PrincipalSponsor Co. II, LLC, pursuant to which the Company committed to provide up to $40,000 in equity financing at closing, less thenumber of shares of BRPM II’s common stock already issued pursuant to subscription agreements entered into with investorsprior to the closing. Pursuant to the Merger Agreement and the subscription agreement in connection with the Acquisition, the equitycommitment was reduced from $40,000 to $21,670 which was funded by the Company upon the closing of the Acquisition in November2020.
BRPM 150
On February 23, 2021,the Company earned $
In addition to theabove, the Company from time to time participates in commitments, loans and financing arrangements in respect of companies in whichthe Company has an equity ownership and representation on the board of directors or equivalent body. The Company may also provideconsulting services or investment banking services to raise capital for these companies. These transactions can be summarized asfollows:
Sonim
The Company had a loanreceivable due from Sonim Technologies, Inc. (“Sonim”) that was included in loans receivable at fair value with a fairvalue of $
In June 2020, Sonimrepaid $
| F- 44 |
Babcock and Wilcox
TheCompany has a last-out term loan receivable due from B&W that is included in loans receivable, at fair value with a fair valueof $
In connection with makingthe loan to B&W, in April 2019 the Company received warrants to purchase
OnFebruary 12, 2021, B&W issued the Company an aggregate $
During the year endedDecember 31, 2020, the Company earned $
One of the Company’swholly owned subsidiaries entered into a services agreement with B&W that provided for the President of the Company to serveas the Chief Executive Officer of B&W until November 30, 2020 (the “Executive Consulting Agreement”), unless terminatedby either party with thirty days written notice. The agreement was extended through December 31, 2023. Under this agreement, feesfor services provided are $
The Company is alsoa party to an Indemnity Rider with B&W, as disclosed above in Note 17 – Commitments and Contingencies.
Maven
The Company has loansreceivable due from the Maven, Inc. (“Maven”) that are included in loans receivable, at fair value of $
On October 28, 2020, inconnection with a capital raise by Maven, the Company converted $
| F- 45 |
Franchise Group
The Company has aloan receivable due from Vitamin Shoppe, a subsidiary of FRG, (“Vitamin Shoppe”) that was included in loans receivable,at fair value with a fair value of $
As of December 31, 2020,the Company is party to the commitment described under the heading “PSP Commitment” and the Loan Participant Guarantywith FRG each as disclosed above in Note 17 – Commitments and Contingencies.
Alta Equipment Group, Inc.
In December 2020,the Company earned $
Dash Medical Gloves, Inc.
On March 2, 2021,the Company purchased a $
Lingo
The Company has a loanreceivable due from Lingo Management LLC included in loans receivable at fair value with a fair value of $
Bebe
The Company has aloan receivable due from bebe Stores, Inc. included in loans receivable at fair value with a fair value of $
National Holdings
On February 25, 2021,the Company completed the acquisition of National Holdings Corporation (“National”), pursuant to an agreement and planof merger dated January 10, 2021, following the successful completion of a tender offer commenced by us on January 27, 2021. Wepreviously owned approximately
NOTE 22—BUSINESS SEGMENTS
The Company’s businessis classified into the Capital Markets segment, Auction and Liquidation segment, Financial Consulting segment, Principal Investments- United Online and magicJack segment and Brands segment. These reportable segments are all distinct businesses, each with a differentmarketing strategy and management structure.
| F- 46 |
During the fourth quarterof 2020, the Company realigned its segment reporting structure to reflect organizational management changes. Under the new structure,the valuation and appraisal businesses are reported in the Financial Consulting segment and our bankruptcy, financial advisory,forensic accounting, and real estate consulting businesses that were previously reported in the Capital Markets segment are now reported in the Financial Consultingsegment. In conjunction with the new reporting structure, the Company recast its segment presentation for all periods presented.The following is a summary of certain financial data for each of the Company’s reportable segments :
| Year Ended December 31, | ||||||||||||
| 2020 | 2019 | 2018 | ||||||||||
| Capital Markets segment: | ||||||||||||
| Revenues - Services and fees | $ |
|
$ |
|
$ |
|
||||||
| Trading income (losses) and fair value adjustments on loans |
|
|
(
|
) | ||||||||
| Interest income - Loans and securities lending |
|
|
|
|||||||||
| Total revenues |
|
|
|
|||||||||
| Selling, general and administrative expenses |
(
|
) |
(
|
) |
(
|
) | ||||||
| Restructuring (charge) recovery |
(
|
) |
|
(
|
) | |||||||
| Interest expense - Securities lending and loan participations sold |
(
|
) |
(
|
) |
(
|
) | ||||||
| Depreciation and amortization |
(
|
) |
(
|
) |
(
|
) | ||||||
| Segment income |
|
|
|
|||||||||
| Auction and Liquidation segment: | ||||||||||||
| Revenues - Services and fees |
|
|
|
|||||||||
| Revenues - Sale of goods |
|
|
|
|||||||||
| Total revenues |
|
|
|
|||||||||
| Direct cost of services |
(
|
) |
(
|
) |
(
|
) | ||||||
| Cost of goods sold |
(
|
) |
(
|
) |
(
|
) | ||||||
| Selling, general and administrative expenses |
(
|
) |
(
|
) |
(
|
) | ||||||
| Restructuring charge |
(
|
) | — | — | ||||||||
| Depreciation and amortization |
(
|
) |
(
|
) |
(
|
) | ||||||
| Segment income (loss) |
|
(
|
) |
|
||||||||
| Financial Consulting segment: | ||||||||||||
| Revenues - Services and fees |
|
|
|
|||||||||
| Selling, general and administrative expenses |
(
|
) |
(
|
) |
(
|
) | ||||||
| Restructuring charge |
(
|
) | — |
(
|
) | |||||||
| Depreciation and amortization |
(
|
) |
(
|
) |
(
|
) | ||||||
| Segment income |
|
|
|
|||||||||
| Principal Investments - United Online and magicJack segment: | ||||||||||||
| Revenues - Services and fees |
|
|
|
|||||||||
| Revenues - Sale of goods |
|
|
|
|||||||||
| Total revenues |
|
|
|
|||||||||
| Direct cost of services |
(
|
) |
(
|
) |
(
|
) | ||||||
| Cost of goods sold |
(
|
) |
(
|
) |
(
|
) | ||||||
| Selling, general and administrative expenses |
(
|
) |
(
|
) |
(
|
) | ||||||
| Depreciation and amortization |
(
|
) |
(
|
) |
(
|
) | ||||||
| Restructuring charge | — |
(
|
) |
(
|
) | |||||||
| Segment income |
|
|
|
|||||||||
| Brands segment: | ||||||||||||
| Revenues - Services and fees |
|
|
— | |||||||||
| Selling, general and administrative expenses |
(
|
) |
(
|
) | — | |||||||
| Depreciation and amortization |
(
|
) |
(
|
) | — | |||||||
| Impairment of tradenames |
(
|
) | — | — | ||||||||
| Segment (loss) income |
(
|
) |
|
— | ||||||||
| Consolidated operating income from reportable segments |
|
|
|
|||||||||
| Corporate and other expenses (including restructuring recovery of $210 during the year ended December 31, 2018) |
(
|
) |
(
|
) |
(
|
) | ||||||
| Interest income |
|
|
|
|||||||||
| (Loss) income on equity investments |
(
|
) |
(
|
) |
|
|||||||
| Interest expense |
(
|
) |
(
|
) |
(
|
) | ||||||
| Income before income taxes |
|
|
|
|||||||||
| Provision for income taxes |
(
|
) |
(
|
) |
(
|
) | ||||||
| Net income |
|
|
|
|||||||||
| Net (loss) income attributable to noncontrolling interests |
(
|
) |
|
|
||||||||
| Net income attributable to B. Riley Financial, Inc. |
|
|
|
|||||||||
| Preferred stock dividends |
|
|
— | |||||||||
| Net income available to common shareholders | $ |
|
$ |
|
$ |
|
||||||
| F- 47 |
The following tablepresents revenues by geographical area:
| Year Ended December 31, | ||||||||||||
| 2020 | 2019 | 2018 | ||||||||||
| Revenues: | ||||||||||||
| Revenues - Services and fees: | ||||||||||||
| North America | $ |
|
$ |
|
$ |
|
||||||
| Australia |
|
|
|
|||||||||
| Europe |
|
|
|
|||||||||
| Total Revenues - Services and fees | $ |
|
$ |
|
$ |
|
||||||
| Trading income (losses) and fair value adjustments on loans | ||||||||||||
| North America | $ |
|
$ |
|
$ |
(
|
) | |||||
| Revenues - Sale of goods | ||||||||||||
| North America | $ |
|
$ |
|
$ |
|
||||||
| Europe |
|
|||||||||||
| Total Revenues - Sale of Goods | $ |
|
$ |
|
$ |
|
||||||
| Revenues - Interest income - Loans and securities lending: | ||||||||||||
| North America | $ |
|
$ |
|
$ |
|
||||||
| Total Revenues: | ||||||||||||
| North America | $ |
|
$ |
|
$ |
|
||||||
| Australia |
|
|
|
|||||||||
| Europe |
|
|
|
|||||||||
| Total Revenues | $ |
|
$ |
|
$ |
|
||||||
As of December 31, 2020and 2019 long-lived assets, which consist of property and equipment and other assets of $
Segment assets arenot reported to, or used by, the Company’s Chief Operating Decision Maker to allocate resources to, or assess performance of, thesegments and therefore, total segment assets have not been disclosed.
| F- 48 |
NOTE 23—SELECTED QUARTERLY FINANCIALDATA (UNAUDITED)
| Quarter Ended | ||||||||||||||||
| March 31, | June 30, | September 30, | December 31, | |||||||||||||
| 2020 | 2020 | 2020 | 2020 | |||||||||||||
| Total revenues | $ |
(
|
) | $ |
|
$ |
|
$ |
|
|||||||
| Operating (loss) income | $ |
(
|
) | $ |
|
$ |
|
$ |
|
|||||||
| (Loss) income before income taxes | $ |
(
|
) | $ |
|
$ |
|
$ |
|
|||||||
| Benefit from (provision for) income taxes | $ |
|
$ |
(
|
) | $ |
(
|
) | $ |
(
|
) | |||||
| Net (loss) income | $ |
(
|
) | $ |
|
$ |
|
$ |
|
|||||||
| Net (loss) income attributable to common shareholders | $ |
(
|
) | $ |
|
$ |
|
$ |
|
|||||||
| (Loss) earnings per common share: | ||||||||||||||||
| Basic | $ |
(
|
) | $ |
|
$ |
|
$ |
|
|||||||
| Diluted | $ |
(
|
) | $ |
|
$ |
|
$ |
|
|||||||
| Weighted average common shares outstanding: | ||||||||||||||||
| Basic |
|
|
|
|
||||||||||||
| Diluted |
|
|
|
|
||||||||||||
| Quarter Ended | ||||||||||||||||
| March 31, | June 30, | September 30, | December 31, | |||||||||||||
| 2019 | 2019 | 2019 | 2019 | |||||||||||||
| Total revenues | $ |
|
$ |
|
$ |
|
$ |
|
||||||||
| Operating income | $ |
|
$ |
|
$ |
|
$ |
|
||||||||
| Income before income taxes | $ |
|
$ |
|
$ |
|
$ |
|
||||||||
| Provision for income taxes | $ |
(
|
) | $ |
(
|
) | $ |
(
|
) | $ |
(
|
) | ||||
| Net income | $ |
|
$ |
|
$ |
|
$ |
|
||||||||
| Net income attributable to B. Riley Financial, Inc. | $ |
|
$ |
|
$ |
|
$ |
|
||||||||
| Earnings per common share: | ||||||||||||||||
| Basic | $ |
|
$ |
|
$ |
|
$ |
|
||||||||
| Diluted | $ |
|
$ |
|
$ |
|
$ |
|
||||||||
| Weighted average common shares outstanding: | ||||||||||||||||
| Basic |
|
|
|
|
||||||||||||
| Diluted |
|
|
|
|
||||||||||||
| F- 49 |